Tuesday, May 31, 2011

When Can Public Agencies Collect on a Bid Bond?

Bid bonds are a guaranty provided to public agencies as part of a bid on a public works construction project.  

Purpose of Bid Bonds: Bid bonds serve two primary purposes:
  • No Frivolous Bids:  Establishes a baseline threshold of bidder responsibility, and prevents or mitigates against contractors submitting frivolous bids they do not intend to honor.
  • Covering Agency Costs:  Compensates the public agency for its costs in the event the low bidder fails to execute a contract with the owner after being awarded the project.
Bid Bond Amounts:  Bid bonds are written by a bonding company (surety), for the required percentage of the bid amount, and may also be limited by a dollar amount.  Bidding documents should specify the required amount of the bid bond (or other bid guaranty such as cash, cashier's check, or certified check).  Often, state laws dictate the bid guaranty amount, or federal grant requirements may also dictate a required percentage or amount.

Collecting on a Bid Bond:  If a bidder is awarded the project and then refuses to enter into a contract with the public agency, the agency would be able to collect from the surety the amount of the bid bond.  In my experience, this doesn't occur very often.  Sometimes, a contractor will choose to pay the public agency the amount guaranteed in the bond, rather than have the bonding company pay it, in order to keep their bond rates from increasing.

Claims of Errors and Bid Bonds:  Can a public agency collect on a bid bond if the low bidder has submitted a claim of error on its bid after the bids have been opened?  It all depends.  
  • Accepting a Claim of Error:  If the public agency accepts the claim of error, the bidder is then relieved of their liability or obligation for their bid.  In submitting a claim of error, the bidder is requesting to withdraw their bid, due to an error in the bid that results in the bid being too low for the contractor to perform the work at that price.  In this situation, by accepting a claim of error, the public agency will not award the contract to the bidder, and thus, recovery from the bid bond would not be permissible.
  • Denying a Claim of Error:  If, on the other hand, the public agency refuses to accept the claim of error, awards the contract to the bidder, and the bidder refuses to enter into the contract, then the public agency could recover the amount of the bid bond from the surety. 
Mike Purdy's Public Contracting Blog 
© 2011 by Michael E. Purdy Associates, LLC 


Anonymous said...

Hi Mike, I have a question bothering me. The bid bond is issued based on the estimated contract value. Let's say if the awarded subcontractor refuse the job due to contract order changes by the General Contractor or owner, will the surety still pay the claim?

Mike Purdy said...

There are 3 basic types of bonds. 1) A bid bond would kick in if a public agency awarded the contract to a firm and the firm refused to sign or execute the contract. In this case, the agency would be able to collect from the surety the amount of the bid bond, typically expressed as a percentage of the bid amount, with 5% being the most common. 2) A performance bond guarantees that the contractor will faithfully perform the work. In the event the contractor fails to complete the project, the agency could go to the surety to have them either provide financial resources to the contractor to complete the job or the surety would pay for another contractor to finish the work. 3) A payment bond protects subcontractors, suppliers, and workers who have not been paid by the contractor or lower tier subcontractors. These parties can file a claim against the bond to try to collect from the surety. I hope this addresses your question. If not, please let me know. Thanks.