Bid Bond Guarantee are type of Bonds. Bonds are used by various governments and corporations for raising money along with financing needed projects. A bond also resembles an IOU that takes place between a borrower and a lender .The entity also issues a bond at a par value with a stated coupon rate. An investor effectively lends a bond to the issuer at a certain time and receives coupon payments that are issued until the par value is repaid by the party that had borrowed the money.
A bond gets issued with maturity or end date. The maturity date is the date when the principal amount of the loan is due to be paid to the owner of the bond. It includes the terms and conditions of the bond along with the details of the amount for the fixed or variable interest payments that will be made by the borrower. The interest payment or the coupon rate is also a part of the total return that the bondholders can earn for loaning their funds to an issuer. The coupon rate is the interest that determines the total payment.
So what are Bid Bond Guarantee?
A bid bond is a kind of a construction bond that safeguards a developer or an owner in a construction bidding process. A bid bond provides a guarantee to a project owner that a bidder will complete the allocated work if chosen. In the absence of bid bonds, project owners will not be able to provide a guarantee that a bidder they chose for a project would be able to finish the job correctly.
The main function of the bid bond is to provide guarantee to the project owner that a bidder will complete the task at hand if selected. The concept of a bid bond assures the owner that the bidder has the necessary finances to accept the work for the price quoted in the bid.
Features of Bid bond Guarantee
- A bid bond is a legal agreement that ensures contractors fulfill their stated obligations on a project.
- This form of assurance provides both financial and legal recourse to the owner of the project.
- Bid bonds are usually submitted in conjunction with the project’s contract.
- Bid bonds are backed by specialized surety companies that guarantee the payments will be made if the contractor fails to uphold their end of the bargain.
- The other main types of construction bonds are performance and payment bonds.
Parties involved in Bid Bond Guarantee
A bid bond of amount not above 10% of the contract order total amount is deposited when a contractor, also known as the “supplier” or “principal”, is bidding on a tendered contract. The bid bond prequalifies the principal and provides the necessary security to the owner (or general contractor), also known as the “obligee”.
This helps to avoid frivolous bids and guarantees that the principal will enter into the contract if it is awarded.
A bid bond guarantees that the “obligee” will be paid the difference between the principal’s tender price and the next closest tender price. This action is only triggered should the principal be awarded the contract but fails to enter into the contract, as agreed, with the obligee. The bid bond penalty is generally ten percent of the bidder’s tender price.
Contractors prefer the use of bid bonds because they are a less expensive option and they do not tie up cash or bank credit lines during the bidding process. Owners and general contractors also use bid bonds because they establish and confirm that the bidding contractor or supplier is qualified to undertake the project.
Are bid bonds returned?
Once a project is successfully completed per the contract, the bid bond amount is return