Monday, April 19, 2010

When is a 5% Bid Bond Not a 5% Bid Bond?

Bid bonds are submitted with a public works bid to guarantee that the bidder, if the low bidder and awarded the project, will enter into a contract with the public agency.  

What Does Your Authorizing Law Require?  Public agencies require bid bonds either as a matter of policy, laws, or specification.  For example, second class cities in the State of Washington are required by RCW 35.23.352 to obtain a bid guaranty for a "sum of not less than five percent of the amount of the bid, and no bid shall be considered unless accompanied by such bid proposal deposit."  Other types of jurisdictions have similar language in state law.  Some states may require a different percentage for the bid bond.

5% Bid Bonds Are Often Limited to Less Than 5%:  If you read the language of some bid bonds, you will find that the bonding company will not necessarily pay 5% of the amount of the bid to the public agency if the bidder fails to enter into a contract with the public agency.  Instead, the bid bond may limit the amount to be paid to the difference between the bid amount of the low bidder and the bid amount of the bidder actually awarded the contract, for an amount not to exceed 5% of the low bidder's bid.

Here is abbreviated and typical language from an actual bid bond illustrating what is sometimes used in bid bonds to describe what happens if the bidder does not enter into a contract:
...if Principal [Contractor] shall pay to the Owner an amount equal to the difference, not to exceed the amount hereof [5% of the amount of the bid], between the amount specified in said Bid and such larger amount for which the Owner procures the required work covered by said Bid, if the latter be in excess of the former, then this obligation shall be null and void, otherwise to remain in full force and effect."
No Exceptions to 5%:  The Washington State Department of Transportation (WSDOT) is very clear in their bid specifications that the bid bond amount must be at least 5% of the amount of the bid:  "A proposal bond shall not be conditioned in any way to modify the minimum 5-percent required."  Section 1-02.7 of the WSDOT Standard Specifications.

Practical Tips:
  1. Read the Bid Bond:  If you have a law, policy, or specification requirement for a 5% bid bond, read the language of the bid bond to see if it is really a 5% bid bond, or only a bid bond for the difference between the low and second low bid up to 5% of the amount of the bid.

  2. Require Use of Your Own Bid Bond Form:  Include in your bidding documents a bid bond form and require bidders to use this form in order to ensure that there are no limitations on the amount of the bid bond.
Bid Guaranty Options:  As an alternative to a bid bond, although used less frequently, some public agencies will permit a bidder to submit a cashier's check, a certified check, cash, or a personal money order.

Upcoming Training:  I will be teaching a two hour class in four different locations around the state on "Construction Bonds: Bid, Performance, Payment, Retainage, and Registration."  The class will also include other speakers discussing insurance.  

Here's the schedule:
  • May 5, 2010, Renton
  • May 19, 2010, Camas
  • May 25, 2010, Everett
  • May 26, 2010, Yakima
These free classes are sponsored by the Washington State Chapter of APWA and the Municipal Research and Services Center (MRSC).  

For more information and to register for these classes, click here.

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