Sunday, March 31, 2013

When Was the Last Time You Read a Bid Bond?

Not all bid bonds are created equal.  

How much will the bonding company pay?  Most bid bonds have language noting that the surety will pay what is called a "penal sum," which is either expressed as a percentage of the bid amount, and/or with a not-to-exceed dollar amount.  If it has a not-to-exceed dollar amount, a public agency should calculate after bid opening whether the not-to-exceed amount meets the required percentage for the bid guaranty, typically 5%.  Here's some typical language from a bid bond regarding the dollar amount:
" the penal sum of five percent (5%) of the Principal's [Bidder's] Total Bid Price for the work, this sum not to exceed _________________________________________Dollars ($___________________) (hereinafter referred to as "penal sum") of lawful money of the United States, for payment whereof unto the Obligee [Public Agency]..."
When is a 5% Bid Bond not worth 5%?  Other bid bonds have similar language describing the penal sum, but limit the amount the surety will pay up to a maximum of 5% (or whatever percentage your agency requires), but not to exceed the difference in bid prices between the bidder covered by the Bid Bond and the bidder ultimately awarded the project.  Here's language from a Bid Bond describing when the surety will pay:
"...The Principal and Surety will pay unto the Obligee the difference in money between the total amount of the Bid of the Principal and the amount for which the Obligee legally contracts with another party to fulfill the Contract if the latter amount be in excess of the former, but in no event shall the Surety's liability exceed the penal sum hereof."
Read the bid bond:  If there is a requirement for a 5% (or other percentage) bid guaranty, public agencies should carefully read the language of Bid Bonds after bid opening to ensure that the bid guaranty amount is not limited and is really a full 5% Bid Bond

Adopt standard agency Bid Bond form:  One way to manage Bid Bonds is for public agencies to develop and adopt their own Bid Bond form and require it to be used by bidders.  This will ensure that the agency is protected to the full extent required.

When may an agency collect on a Bid Bond?  A public agency may collect on a Bid Bond (or other form of bid guaranty) only if the bidder has been awarded the project and refuses to execute the contract.

Mike Purdy's Public Contracting Blog 
© 2013 by Michael E. Purdy Associates, LLC

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