You must have probably heard of bonds in finance. They are securities or investments in the form of a loan. It can be used to fund businesses or projects for governments. There are various kinds of bonds, like bid and performance bonds.
So, you must have been having a lot of questions like what is bid bond? Why is it important? In short, bid bonds are tender security that the owner receives from the contractor as a part of the process. You might have witnessed bid bonds being used in the construction industry or jobs which follow a similar bidding pattern.
It’s time to study about it in detail and the relevance they would add to your life if you belong to the same industry. This article incorporates a deeper understanding of bonds and their relevant costs.
About Bid Bonds
To answer what is a bid bond this is often used in construction contracts or other projects that follow a similar selection process. The primary function of a tender is to assure the project’s owner that the bidder must finish the task given to him if he gets selected.
The tender concept assures the owner that the bidder has the necessary financial resources to purchase the work at the price stated in the offer. This guarantee is a type of bond guarantee that protects the owner as a part of the bidding process.
A tender guarantee assures the project owner that the assigned work will be completed if a bidder is selected. Without this bond, the project owner cannot guarantee that the chosen bidder for the project will be able to complete the task on time. He will also not be liable for compensatory charges.
Moreover, suppose the bidder who wins fails to provide a bond or goes bankrupt; it’s the contractor or company’s duty to ensure the owner receives a new bidder to complete the task. He might also get compensatory charges in the same case. It’s usually a win-win case for the project owner to go for the bid bond.
Importance Of A Bid Bond
When developers decide to tender on a large or small development project, they often filter out bidders. The reason for rejection is that the developer wants to ensure that the bidder can complete the job according to the criteria mentioned in the contract.
Also, Bonded bidders are always a better option, as the third party or the surety company will not approve a tender security application. This rejection is possible if the bidder is not credible.
The bonding process is extensive, and applicants are forced to undergo brutal background checks. Underwriters promptly request copies of applicants’ credit reports. This document includes your current credit rating and outstanding fees.
A good credit rating provides the insurer with sufficient evidence and an opportunity to approve your application. While if you have a low credit rating, it doesn’t rule out your chances of bidding. There are times when low credit rating bidders have been given the opportunity to get bonded.
Additional Insights Into Bid Bonds
A third-party guarantor may provide bonds in the form of a written guarantee that can be presented to the project owner or client. A tender ensures the contractor has sufficient finances to carry out the project. A performance bond usually replaces a bid bond when the tender is confirmed and the contractor is.
The cost of bonds depends on factors like the location of the project, its critical insights, the owner, the cost of the project, etc. For small tender projects, the fee may range from $100 to $200.
Conclusion
Bid Bonds are helpful for the owner as the contractors usually submit a detailed project analysis, including the costs, in a bid format. The person who wins the tender gets the task of completing it. If the person fails to do so, it’s the contractor and the respective company’s responsibility. Either they find another person or pay compensatory charges for the period.
This bond is a win-win situation for the owner and is a significant asset in the construction industry.