Bid Bond

Bid bonds are very important to both project managers and contractors in the construction business. A contractor who purchases a bid bnd can show any project owner that they have the wherewithal to complete a project as specified by the owner or manager, and in the time frame required. It serves as a kind of guarantee to the job owner that you as a contractor are stable in your business operations and that you have the financing and all the necessary resources to undertake the kind of project specified in the contract. 

Since these bonds allow a project manager to collect compensation in the event of unsatisfactory performance or failure to complete the project, a project manager has a much higher degree of confidence when using a bonded contractor. In effect, a bid bond ensures that regardless of what happens on any given project, the construction manager or owner will not suffer financial losses as a result of anything done or not done by a contractor. 

From the standpoint of a venture owner, requiring contractors to obtain bid bonds will automatically ensure that there will be no ill-considered bids submitted, since any contractor would have to live up to the terms of the bond, or pay the penalties if they default on those terms. Surety companies that sell bonds to principals are always very careful in screening bond applications because the surety company can be held liable in the event of a claim. 

For that reason, it's standard procedure to conduct thorough financial assessments, as well as a credit check on any contractor business applying for a bid bond. When the bidding process is underway among several contractors, each one will estimate the total cost for a project and propose a dollar figure for completing the job. This takes into account the contractor's own expenses and the employees that have to be paid while working on the project, as well as the contractor's own time and involvement. Each contractor will then submit this total dollar figure estimate to a project owner and wait for the selection process to conclude. 

The surety company issuing bid bonds to contractors will generally compensate the owner an amount equal to the difference between the two lowest bids. In the event of a claim for noncompliance or incomplete work, the surety company has the option to sue the principal, with the expectation of recovering costs incurred to pay off the claim registered by the project owner. The likelihood of this occurring will depend entirely on the language written into the bond itself.

When the obligations specified in a bond are not fulfilled by the contractor, both the contractor (who will be specified as the principal in the bond language), and the surety (the company that sells it to the principal) are liable for the amount of money being claimed by the project owner. The amount of money being claimed by the job overseer will include all costs related to the failure of the project itself, as well as the costs for securing a replacement contractor to complete or rework the project.

The Miller Act, passed by Congress in 1935, is legislation closely related to the area of bid bonds and contractors performing work for project owners. In this case however, the construction job owner is the federal government, and all contracts being bid on are for federal construction projects.  

Under the provisions of the Miller Act, every contractor who bids on one of these federal projects is required to post a payment bond, which covers all labor and materials, as well as a performance bond, whenever the value of the project exceeds $100,000.

The requirements of Miller Act from the standpoint of the contractor are the following:

• The contractor must purchase a performance bond that provides a measure of protection for the federal government.
• The contractor must purchase a payment bond that covers suppliers, tutorials and labor. This payment bond is generally required to be an amount equal to the total value of a project itself, and not less than the amount of the performance bond.
• All subcontractors involved in the job are to be covered under the terms of the payment bond, as well as all suppliers who provide materials for the project.
• All second-tier suppliers will also be covered under the payment bond, and the second-tier suppliers are those that would be hired by subcontractors.