Bid Bonds

Written by Michael O'Brien
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Essentially, bid bonds are a type of guarantee included in a standard contract bond. A contract bond is a promise to an organization or individual that the company they have hired to do a job will live up their contractual obligations. Included in a contract bond are performance bonds, payment bonds, supply bonds, and bid bonds. Let's look at the last of these.

Bid Bonds: Cost Obligations

When a company, individual, or other type of organization needs some kind of service, such as construction, they begin by collecting bids. Basically, building contractors state how much it will cost them to complete the project within the quality and time guidelines that have been set forth.

Based on these bids, a decision is made as to which contractor will be hired. Now, what is to stop such a contractor from simply lying? They may have said it would cost them a certain amount to complete the project given the time and quality restraints presented, but maybe it will end up costing them more. Even if malicious intent doesn't occur, such a contractor may have simply miscalculated.

The Importance of Surety Companies

A bid bond is a means of guaranteeing that the price a contractor has quoted will be an accurate assessment of the actual cost of the project. A surety company bonds such contractors as a means of guaranteeing they will act in good faith and perform all obligations as promised. Bid bonds are a means of shifting accountability. If the contractor fails to complete a project within the price range they stated when they made a bid for someone's business, the surety company distributing the bond must pay for the excess, not the obligee.

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