What are Construction Bid Bonds?
When bidding on large projects, some contractors may be tempted to submit an unrealistically low bid in order to get the contract. The problem is, once the project is underway, either the contractor runs out of money before the project can be completed, or the project owner is forced to pay more than their budget may allow. Bid bonds work like an insurance policy that protects both parties. It serves as a means to protect project owners, while also discouraging a contractor from submitting a bid for a project that they can’t complete.
How Does a Construction Bid Bond Work?
A construction bid bond is a three-way agreement between a project owner (obligee), a contractor (principal) and a bonding company (surety). A project owner asks a contractor to acquire a bid bond for a project. The contractor then goes to a bonding company to get bonded. Normally, the bonding company runs a credit check on the contractor and if the contractor’s credit is good, the bonding company will provide the bond in exchange for a premium, usually 1 – 3 percent of the total cost of the contract. Some bonding companies may also request some form of collateral, in the form of a deposit in an escrow account, or a letter of credit from a federally insured financial institution. The collateral can be for as much as 20 percent of the total cost of the contract. Once the contractor receives the bid bond from the bonding company, they submit the bid bond to the project owner. If the contractor gets the contract and completes the project, the bonding company keeps the premium and returns the collateral. If the contractor gets the contract but fails to complete the project, then the bonding company is responsible for ensuring that the project owner is compensated for the unfinished work. The bonding company may then keep all or part of the collateral to cover what it pays to the project owner.
Getting A Construction Bid Bond with Poor Credit
That’s the way things work if a contractor has good credit. But sometimes responsible contractors may be challenged by a low credit score or other financial issues. These can affect their ability to get a construction bid bond on the standard market. If they can’t get bonded, it makes them less competitive, especially when bidding for larger contracts.
That’s where Ox Bonding can help!
We look at more than your credit score. Instead, we take your references and performance history into account, as a part of our decision making process. Usually, we can offer construction performance bonds at only a half percent to one percent more than the cost of a bond on the standard market. We also offer contractors our Construction Project Accounting service as an alternative to collateral. This can improve your cash flow, and allows us to take the financials off your hands. That means you can get your construction performance bond and get back to work. Looking to get a bond for your next project? Get a free quote today or call (877) 55-THE-OX to learn more.