The Bid Bond guarantees the Employer that the bidder will sign the contract, if awarded, or will comply with other specified obligations (such as to issue other bonds as provided in the bidding documentation). They are rather frequent, especially in mid/big size projects.
Among the several bonds normally used in construction contracts, the Bid Bond does not represent a big risk for the Contractor/bidder provided that he has carefully ascertained all the bidding conditions and documents and he is really willing to sign the contract and execute the construction works if the contract is awarded to him.
The Bid Bond normally is issued in the form of an on-demand bond in a percentage between 1% and 5% of the contract value, but the percentage can reach even the 10% of the contract value in certain cases.
A. How it works
Generally, the Bid Bond can be called by the Employer in the case the winning bidder does not enter into the construction contract (if and when awarded) but can also be called in the case the winning bidder does not comply with other obligations after the award of the contract.
As it is the case also for the other bonds normally used in construction contracts (such as the Advance Payment Bond, the Performance Bond or Warranty Bond) the Bid Bond is normally issued in the form of an on-demand bond (ie a bond which can be called by the Employer without the need to demonstrate the actual default or breach of the Contractor and the payment of which is made by the guarantor upon simple request from the Employer).
The reason is rather simple being that with this type of bond, the Employer does not even need to start a legal action to receive the payment of the guarantee.
It goes without saying that when a bid process is launched, the Employer will incur costs for the bidding process itself and an on-demand bid bond guarantees the Employer that he will recover at least all the costs incurred for the bidding process.
In such cases, the Employer will simply need to 'declare' that the Contractor has breached certain obligations under the contract (or under the bidding documents) and the guarantor will be under the obligation to pay without any objection.
It is clear therefore that the real risk here is not specific to the Bid Bond but instead to the form that the bond will have (as said, if issued in the form of an on-demand guarantee).
The winning bidder seldom will have arguments or objection to prevent the guarantor from paying the bond except in the case the bond has been called in bad faith (or fraudulently) by the Employer (say for instance that the Employer changes substantial clauses of the contract after it has already been awarded to a Contractor who consequently does not intend to sign the contract).
B. 5 Tips to reduce the risks for the Contractor
As Contractor, there are few tips that can reduce your risks of a fraudulent calling of the Bid Bond:
- ASCERTAIN that the events which entitle the Employer to call the bond are clearly identified in the text of the bond and are limited to the failure to sign the construction contract for no reason;
- ASCERTAIN how the amount that can be called is calculated, if it is not already fixed in the bidding conditions. In theory, in fact, the bid bond should cover only the actual costs incurred by the Employer to start the bidding process again or to select a second bidder. It is not rare however that the Employer will seek to recover also the difference between the price offered by the original winning bidder (who has not signed the contract) and the higher price offered by the new bidding winner;
- MAKE SURE that the Bid Bond will expire automatically (even in the case the original document representing the bond is not handed over back to the Contractor) once the contract is signed or, as maximum, once the Contractor has issued the Performance Bond;
- VERIFY is the Bid Bond is in the form of an on-demand bond or a conditional bond and try to negotiate the issue of a conditional bond;
- INSERT a clause, if the guarantee will be issued in the form of an on-demand bond, which obliges the Employer to clearly state (when calling the bond) that the winning bidder has not signed the construction works without grounded reasons (such statement will be of the utmost importance in the case of fraudulent calling of the bond).
The Bid Bond is a guarantee rather frequent in mid and big size projects which secures a legitimate interest of the Employer and prevent the submission of offers from unqualified bidders of from contractors which are not actually willing to sign the contract and execute the works.
At the same time if the Bid Bond is issued in the form of an on-demand bond it can be open to abuse from the Employer who (acting in bad faith) can call the bond being aware that he is not entitled to obtain the payment.
A careful analysis of the entire text can allow the Contractor to minimise the risk of an unfair or fraudulent calling of the Bid Bond.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.