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Bid bonds were created to keep frivolous bidders out of the construction bidding process by assuring that the person or company that won the bidding war would enter into the contract and provide the required payment and performance bonds. If the lowest bidder fails to honor these commitments, the owner is protected up to the amount of the construction bid bond (usually the difference between the lowest bid and the next lowest bid).
Prior to bid bonds, construction companies would often issue low bids to secure a contract and then increase the price as the job progressed or refuse to complete the construction project because they would not profit from the job. Now most large construction projects require that a contractor or construction company submits a bid bond, however. This assures the hiring developer that bidding construction companies are serious about the job and are financially able to complete the project with the amount of the bid.
Bid bonds are usually purchased in an amount ranging from 5% to 20% of a total bid (10% being the most common amount). Since the surety company that issues a bid bond also promises to issue a performance bond on the contract, the processing and underwriting of bid bonds is just as strict as other contract bonds. Often times surety companies require financial insurance from the owner or owners of the construction company in case the company fails to complete the contract or encounters financial hardships in the middle of a contract. Thus, the owner’s personal financial information or credit score may be used as part of the bid bond application process.
CSIA is one of the leading providers of construction bonds, bid bonds, and contractor’s license bonds in California. If you have any questions about bid bonds, or if you would like a contractor bond or bid bond quote, please do not hesitate to call us toll free at 1-800-675-2000.