Let’s take a look at the implications of each and when to use them, or not!
First, a quick primer on bids:
When contractors submit a proposal on bonded public work, bid security is normally required. The security assures the bidders sincerity: They will accept the contract if offered or pay a penalty for walking away.
Typically, the specifications require a Performance and Payment Bond or other form of acceptable security equal to the contract amount.
About the forms of bid security
1) Cash is King, but not when it comes to bid security. Bid security amounts are usually thousands of dollars so this method is not realistic for many contractors.
2) Certified Checks are similar to cash. This means the contractor must estimate the maximum proposal amount and arrange for a check payable to the obligee. Initially, the bid bond percentage is known but not the bid dollar amount. The specifications require security ranging from 5-20% of the proposal amount. However the actual proposal amount is often not compiled until close to bid time when all the vendor prices have been received and negotiated. To use a check, the contractor must estimate an amount sufficiently high so it is adequate to cover the bid figure when it is finally known.
3) Bid Bond issued by the surety. The advantage is that the bidder’s money is not tied up (as compared to cash or a check). As a precaution on public work, obligees hold the bid security of the second and third bidders until the contract is awarded – which could take weeks. This means the contractor’s cash or check could be tied up and the likelihood is that they will not win the project.
Looking at these options, a bid bond is the preferred choice. However, a bid bond is not always available when needed. When this happens, the bidder may consider an alternative.
Normally there is no requirement to use a bid bond specifically. The bidder also has the latitude to use one surety for the bid bond and a different one for the P&P bond (although some sureties dislike following another’s bid bond.)
Why would a bid bond not be available?
1. The contractor does not have a surety.
2. Short notice: Not enough time for the surety to make an underwriting decision.
3. Short notice 2: The surety has approved the bid bond but there is not enough time to issue.
4. Bid bond declination: The surety considered the project but will not support it.
5. Bid bond declination 2: The surety wants to support the project but they are unable to due to their lack of credentials, their insufficient capacity, licensing issues, or other problems on the surety’s part.
6. When contractors are changing bonding agents or sureties, there could be a gap in service where the new surety is not ready.
In all these cases, the contractor can decide to bid with cash or a check. However, there may be a downside to consider. Let’s look at each of the six scenarios described above.
Risks of bidding with cash or a check
1. No surety: The contractor could forfeit the bid security if they are awarded the project but are unable to produce the P&P bond.
2. Short notice: The risk here is the same as #1. Forfeiture could be the result if no P&P bond can be arranged within the timetable allowed.
3. Short notice 2: This is one situation where the check may be a reasonable alternative assuming the surety has provided a written approval to bond the contract.
4. Bid bond declination: This is a particularly troubling situation because the effort to arrange a Performance Bond faces two obstacles:
- Time: Contract awards demand the issuance of the P&P bond by a specified date. There could be insufficient time to set up a new surety relationship.
- The new surety, which hardly knows the contractor, is being asked to bond a project the incumbent surety declined. The incumbent was willing to lose the account over this project. Can the new underwriters be confident they are making a better decision than those who know the account well?
5. Bid bond declination 2: This example isn’t as onerous as #4. The problem is that the surety wants to bond the project but can’t. The new underwriters will be less hesitant than in #4. (So why don’t they just issue a bid bond to help the client get to the next step with another surety? See answer below.) If cash or a check is used, a surety must be arranged to prevent forfeiture.
6. Changing sureties: Handle the same as the short notice situations.
While it’s true bidding with cash or a check is usually an option, it places the contractors funds at risk. Contractors should not consider using cash or a check unless the availability of the P&P bond is confirmed in writing.
Answer to #5: The surety would not want to issue the bid bond if they can’t provide the performance bond, which is the main product of the surety operation. Second reason, if no performance bond is arranged by the client, the bid bond could go into claim. There is little for the surety to gain in this situation.
Note to agents, contractors and other readers: We are not offering legal advice and do not assume to have covered all possible situations in this article. Every bonded contractor should have a good surety attorney to handle such matters.
Want this expertise and creativity on your next Bid or Performance Bond? FIA Surety is a NJ based bonding company that can help! We have specialized in Bid, Performance, Site and Subdivision Bonds since 1979.
Steve Golia is Marketing Manager for FIA Surety. Call Steve now: 856-304-7348
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