Despite what you may think bid bonds are not investment instruments that allow you to earn money from interest. They are actually a form of assurance product that is used specifically in the construction industry and public works projects. How does it work?
Whenever there is a new construction project, the project owner opens it to bids to all qualifying contractors. All the contractors need to submit a bid bond along with their bid documents. Bid bonds basically assure the project owner that the project will be completed, or at least the project owner will be compensated, in case the contractor is unable to fulfill his obligations as a contractor. A bid bond is also known as a surety bond and it is always paired with a payment bond. The law requires a bid bond for projects over $100,000 and a payment bond for projects over $35,000.
Where can you get a bid bond? You can get them from surety bond companies. If you search for it online, you will see that there are many of them out there. However, not all of them would be willing to do business with you, especially if you fail to meet certain criteria. Most of them have a minimum requirement on financial standing and credit rating for all the companies that they extend bonds to.
Still, no matter what the size and shape of your company, it will not hurt to ask at least three different surety companies for a quote. If you are a new company or had a company that had just come back from a bankruptcy, you need to be prepared to pay more for a bid bond.
The price of a bid bond is usually just ten percent less than the total value of the project. If you are considered a high-risk contractor, be prepared to pay more, something in the area of over ten percent.
As for a payment bond, we are not quite sure how it works, however, we are quite sure that the companies providing it are the same companies offering the bid bond that goes with it.
As we said before, there are many surety companies out there that you can do business with. Again, not all of them would be willing to do business with you, and not all of them can do business with you.
As far as we know, you need to deal with a local surety bond provider if you are working on a local project. If you are working on a federal project, you have to work with a company that has a national presence. But that is just a guess that we have. We could be wrong.
Anyway, when it comes to finding a surety bond company, make sure to check out at least three. By check out, we mean asking them for a quote. You might just find that there is a small yet significant difference in their prices. So, go ahead and get quotes now.