Wednesday, January 30, 2013

Checklist for Reviewing Bid Bonds

Bid Bonds are the most common form of bid guaranty for public works construction projects.

Inadequate Bid Bond may render bid non-responsive:  Failure of a bidder to provide a bid bond in accordance with the bid documents may render a bid non-responsive.  It is important for public agencies to carefully review bid bonds after bid opening for compliance.

Checklist:  Here's a short checklist of questions to ask and items to review on bid bonds:
  • Is it for the correct project?  Look at the project name to ensure that it is for the project the bid has been submitted for, and that a bid bond for a different project has not been accidentally included in the bid envelope.
  • Is the percentage amount limited by a dollar amount?  Most bid bonds include language similar to: "5% of the amount of the bid" (or for a different percentage depending on the requirements).  If the language of the bid bond states "5% of the amount of the bid, not to exceed $_______," then the public agency must calculate the dollar amount included on the bid bond to make sure it is at least 5% of the amount of the bid.
  • Is the percentage amount limited in any other way?  Some bid bonds are not actually for 5% (or whatever percentage is required) of the amount of the bid, but will state that the bond is good for up to 5%, not to exceed the difference in the bid amount of the low bidder (who fails to execute a contract) and the second low bidder's bid price.  Read the language of the bid bonds submitted to ensure that it is for a percentage that is not limited in this manner.
  • Does the bid bond guaranty that the contractor will provide both a performance and payment bond?  A bid bond is the guaranty of the bonding company that the contractor, if awarded the project, will enter into the contract and provide a performance and payment bond.  Some bid bonds, however, do not have language promising that the contractor will provide bonding to protect for both performance and payment.  In a federal contracting case from last year, a bid was rejected because the bid bond only guaranteed that the contractor would provide a performance bond.  Click here for a summary of this case.  Read the bid bond to ensure it includes a guaranty that the contractor will provide performance and payment bonds (either separately or a combined bond).
  • Has the bid bond been signed by the surety and contractor?  Without signatures from both the surety and contractor, the bonding company could argue that the bid bond was unenforceable.  An unenforceable bid bond essentially means that the bidder did not provide any bid guaranty to protect the public agency.
  • Was the bid bond accompanied by a Power of Attorney?  A Power of Attorney is a document from the bonding company verifying that the individual who signed the bid bond on behalf of the surety is currently authorized to obligate the bonding company.  Check to see if the individual's authority may be limited by a dollar amount of bonding.  Review the Power of Attorney to see if it is current.  If you have questions, call the bonding company, not the attorney-in-fact who signed the bid bond.  Review your bid documents to ensure that you are requiring a Power of Attorney to be submitted with the bid bond.
  • Does the surety meet the public agency's standards?  Many public agencies will establish standards of financial strength that the surety issuing the bid bonds must meet.  Standards may include a particular rating from of an independent rating company, A.M. Best.  Some agencies will also specify that the surety must be authorized to do business in the state and be on a particular state list.  Finally, some agencies require the surety to be on the U.S. Department of the Treasury's Listing of Approved Sureties (Department Circular 570).
Other tips:  The following additional tips are helpful for ensuring that public agencies receive an appropriate bid bond.
  • Agency issued bid bond form:  Some agencies require that bidders submit the bid bond using an agency issued bid bond that is included in the bid documents.  This ensures that some of the problems associated with bid bond language will not be encountered.
  • Define the bid amount that the bid bond must cover:   Review your bid documents to ensure that the instructions to the bidders clearly defines what you consider to be the bid amount.  Does it include sales tax, additive, and alternate bid amounts?  Generally, the best practice is that the bid bond should cover the maximum dollar amount that could be awarded by the public agency.
  • Beware of forged bonds:  I've blogged in the past on cases where bid bonds have been forged.  Click here to review what I've written in the past on this subject.
  • When can you go after a bid bond?  The purpose of bid bonds (or any other form of bid guaranty) is to provide compensation to the public agency in the event the bidder who is awarded the project fails to sign the contract and provide the performance and payment bonds, and evidence of insurance within the time period specified in the bid documents.
Mike Purdy's Public Contracting Blog 
© 2013 by Michael E. Purdy Associates, LLC

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