Bid Bond to secure Performance Bond

[1980kw]

I currently work for a general contractor that will be requiring subcontractors to provide performance bonds for a future project. When bidding this project out to our Subcontractor community, does requiring bid bonds help secure performance bonds for the future successful Subcontractor? This is private work and I fear that this will deter Subcontractors from bidding the work if it will not assist in securing the performance bonds. Along similar lines, would requesting a letter from the Subcontractors surety indicating bonding capacity for the particular project be sufficient?

[Admin]

A bid bond is simply a guarantee that the surety will write the performance bond if the contractor is awarded the job.

Some contractors may be deterred due to the additional work of obtaining bond. More often the case is the contractor can not qualify for a bond. The GC could be using the requirement as a screening process to see who is "bondable".

If the GC is only requiring a letter of bonding capacity, it is likely that they are trying to use surety underwriting to screen out higher risk contractors, but not actually have to pay for a bond. This practice is quite common and is looked down upon in the surety community. The abuse of services makes it so bond producers are hesitant to review a bond for a private contract.

[1980kw]

Can the bid bond be only for $1 or $100? In other words, if the goal is to guarantee performance bond....does the bid bond value really matter?

[Admin]

Excellent question. The obligee (who is requiring the bond of the principal, a contractor) can require only a percentage of the contract for the bid bond. For example, a 10% bid bond on a $100K contract would only require a $10K bid bond. This allows the obligee to file a claim for roughly the amount of the bid spread (ideally anyhow).

A common misconception is that a contractor only needs to be approved for the amount of the bid bond. However, bonding companies base approvals on the entire project, as the bid is a guarantee that they will write the performance bond. Therefore, the contractor must qualify using the contract price, not the bid bond amount.

Let me know if there is anything else you are curious about.

[1980kw]

I understand the contractor needs to be preapproved for the entire contract value.....if the goal is to guarantee execution of a performance bond, then wouldn't the value of the bid bond be insignificant? So therefore I could request a .5% bid bond or even less to acheive the ultimate goal of the surety acknowledging that subcontractor's ability to obtain the performance bond?

Is there a more efficient way to go about this? Such as would a simple letter from the surety stating preapproval of the performance bond be sufficient in lieu of the bid bond? Or does the surety feel more confortable with the bid bond leading to performance bond to make sure that a bond will actually get executed in the future?

[Admin]

The contractor (principal) does not get to decide the bid bond percentage, the obligee (who is requiring the bond of the principal) does. An obligee would never require a bid bond as small as .5%, as it would most likely not cover the bid spread if a claim arose.

I'm assuming the letter would be a written guarantee to write a performance? If so, the bid bond would still be the preferred alternative. For one, it is how bonding companies and agencies are use to doing business. More importantly, a letter is nothing more than the word of who writes it. A bid bond a guarantee with financial backing, which can cover a bid spread if needs be.