Understanding Construction Bid Bonds in New York City

What Do I Need to Know About Bid Bonds?

There are three parties involved in bid bonds: the obligee, the principal, and the surety company. The obligee is the public or private owner or the developer of the construction project to be completed. The principal is the contractor submitting the bid, and the surety agency is the company that provides the bid bond to the bidder/principal.

Prior to placing a bid, the principal obtains the bid bond from the surety agent. Each bid bond is assigned a penal sum based on the total forecasted cost of the completed project. Penal sums identify the maximum payout the obligee will receive in damages should the principal default on their bid.

Most often, penal sums amount to 5 to 20% of the total bid price.

How Do Bid Bonds Work?

Bid bonds are an important part of the construction industry, helping to prevent project bias. The provision of a bid bond ensures contractors are unable to submit financially untenable bids in order to secure the project for themselves. They help to keep the bidding process fair for all interested and capable parties.

When bidding begins on a construction job, the interested contractors (principals) will finalize an estimate as to what they feel the cost of the finished project may reasonably be when all factors have been included. When they have finalized their estimate, the contractor will submit a bid to the public or private owner (obligee.) The contractor with the lowest, responsible bid will be awarded the contract.

The bid bond holds the contractor responsible to honor the bid submitted to the owner. Once a contract has been signed, the contractor is then legally bound to fulfill the terms of the agreement. Should the contractor fail to do this, they are in violation of the contract, leaving the owner to offer the project to the next lowest bidder.

The bid bond essentially provides financial compensation to the owner. It provides the difference in funds between the lowest bidder who declined to enter into contract, and the next bidder who is contracted with for the work.

How Much Do Bid Bonds Cost?

The price a contractor will pay for surety bonds is determined by several different factors, including the cost, size and location of a project as well as the owner and financial history of the contractor.

However, bid bonds themselves should not carry a fee. If your surety agent is charging a fee for a bid bond, contact Metayer Bonding Associates for a review.

What are the Requirements for a Bid Bond?

NY State Finance Law section 137, also known as the Miller Act, requires all contractors to provide bid bonds for bids on any public construction project. Many private firms also insist upon bid bonds as a form of risk protection for themselves.

Providing surety bonds to prospective public and private owners allows you to remain competitive in a highly competitive industry. Some states require surety bonds in order to apply for any necessary permits or licenses. Today, most public and private owners mandate bid bonds from contractors wishing to participate in the bidding process.

TYPES OF CONSTRUCTION AND COMMERCIAL SURETY BONDS

• Bid Bonds
• Performance and Payment Bonds
• Contractor Surety Bonds
• License and Permit Bonds
• Release of Mechanic’s Lien Surety Bond
• Subdivision and Site Improvement Bonds
• Connecticut Performance and Payment Surety Bonds
• New York City Performance and Payment Surety Bonds
• Understanding New York City Bid Bonds
• Understanding New York City Contractor Surety Bonds
• Court Bonds
• Financial Guarantee Bonds
• Massachusetts Paid Family Medical Leave Bonds
• Connecticut Paid Family Medical Leave Bonds
• Crumbling Foundations
• Marijuana Bonds