Bid Bonds | Surety Products | FCA Surety Bonds (2024)

What are Bid Bonds?

A bid bond guarantees that the contractor (otherwise known as Principal) will enter into a contract with the project owner (also called Obligee) if they are the low bidder on a project and are awarded a tender. Owner’s ask for bid bonds because they don’t want to sustain the cost of a re-tender if a bidder is low and awarded and subsequently backs out of the contract. What the bid bonds says is that if a bidder who is low and awarded backs out of a contract, the project owner has the right to claim on the bid bond for the value of the bid bond or the difference between the first and second bidder, whichever is lowest.

Sometimes project owners will also ask for another type of surety bond called a consent of surety (also know as agreement to bond). This document is provided with the bid bond at the tender stage and is a guarantee from the surety company that if the principal is low and awarded, the surety will provide the required construction bonds (i.e. performance bond and/or labor and material payment bond).

Surety For Tendering Stage

• Pre-qualification Letter

  A pre-qualification letter is not a bond. It is a letter from Surety to the owner that confirms the “bondability” of its contractor client. A pre-qualification letter is not binding.

• Bid Bond

  It is a bond issued to serve as a guarantee to a project owner that the winning bidder will satisfy the terms of a tendered contract.

• Consent of Surety

  Consent of Surety is also known as Agreement to Bond. It is a legal commitment, but it is not a true bond as it is only executed by the surety, not the contractor. This letter confirms to the project owner, that should the contractor be awarded the job, the surety will provide the performance and payment bond as per the terms outlined in the letter.

Who Needs a Bid Bond?

There are a variety of businesses that require bid bonds. The most common are construction companies. An example would be a general contractor building a hospital or mechanical contractor upgrading the HVAC systems in an arena.

Common Types of Contractors that Require Bid Bonds:

• General Contractors
• Electrical and Mechanical Contractors
• Snow Removal and Landscape Contractors
• Sewer & Watermain Contractors
• Road Paving Contractors
• Heavy Civil Contractors

The use of these bonds has increased significantly over the past few years as various provinces have looked at re-vamping their Construction Acts. Ontario was the first to finalize this process and has made bid bonds mandatory on all publicly funded construction projects over $500,000 in value. This has had a ripple effect in the private sector with a number of consultants writing the requirement for bid bonds into their tender specifications.

Types of Public Owners that Require Bid Bonds:

• Municipal Owners
• School Boards
• Ministry of Transportation Ontario
• Public Works Canada
• Defense Construction
• Hospitals

To secure a bid bond a contractor will need to have a surety facility. If you are thinking about bidding on public work, please reach out to FCA to discuss how we can help in establishing this for your business.

Once you have established a surety facility the process to obtain these bonds is very easy. When you identify a project that you would like to bid that has a requirement for a bid bond, you would prepare what is called a bond requisition form. This form provides some basic details on the project you are looking at bidding. This would include who the project owner is, your estimated tender price, closing date of the tender and estimated project duration. You would then submit this bond to your surety broker and they would prepare your bonds and have them ready well ahead of the tender close.

It is important to note that once you have a facility, the individual jobs do not require approval from the surety. Providing the bond requisition is purely a way for the surety broker to get the basic information they require to complete your bid bond.

If there is a project you are interested in that is larger than your facility limits, your broker should be helping you build the business case around that project so that you can secure approval from your surety company.

A surety company will look at a variety of items when establishing a surety facility and providing bid bonds. They look at the capital of the business, character of the owners, and capacity of the company to execute the work.

Capital refers to items like the financial strength of the business, personal net worth of the owners and ability to cash flow the work the business intends to undertake.

Character relates to an owner’s past history of completed projects, their ability to provide timely and accurate reporting and strength of their references.

Capacity refers to a company’s ability to execute the work it intends to bid. This includes what accounting systems the business has, what project management expertise and tools they use and whether they have the required equipment.

This process can look complicated but it doesn’t have to be. Having an experienced surety broker that understands this process and has the right markets will ensure that establishing a surety facility is an easy and transparent process. Please reach out to FCA to discuss how we can best help your firm establish a surety bond facility.

When you establish your surety facility with your broker you will be provided a single job limit and an aggregate limit. An aggregate limit is the total cost to complete of all of your outstanding work at any given point in time. You will also be provided with your surety bond rates for any performance and labor and material payment bonds you require and will also be charged an annual surety fee.

Bonding Facility Example:

Single Contract Limit: $1,000,000

Aggregate Contract Limit: $5,000,000

It is important to note that these limits are guidelines but are never set in stone as contractors require flexibility with their limits to ensure they can properly service their clients and grow their business.

As a long-standing surety brokerage we have excellent working relationships with all of the surety companies currently operating in Canada. Our key partners include:

• Intact
• The Guarantee Company of Canada (GCNA)
• Trisura Guarantee
• Aviva
• Travelers
• Zurich
• Western Surety
• Economical
• The Hartford
• Liberty
• Tokio

We know these companies well and understand their underwriting philosophies and principles. This is very important as no two sureties are alike. By understanding the appetites of each company, we are able to place our clients with the right surety partner. This ensures not only excellent terms but also a long-standing relationship that supports the growth and flexibility that our contactors demand.

The purpose of a bid bond is to provide assurance to the project owner that the bid was submitted in good faith. Should a contractor be awarded the contract and decide not to undertake the job, the project owner can then use the bond to cover the difference between the awarded and second lowest compliant bidder. With a value of 10% of the contract price, the bond is almost always sufficient in covering the difference between the two bidders.

The most widely used bid bond was created by the Canadian Construction Documents Committee,the most recent version being the CCDC 220 – 2002 bid bond which created the 10% standard. While most bid bond requirements call for a 10% bid bond they can vary from 5% to 15% of the tendered amount.

For a more complete explanation, please read our 10% bid bonds article.

There are a few key differences between a bid bond and a performance bond.

1. The bid bond is required at the tender stage and is used to secure your bid. A performance bond is required aftercontract award and is used to guarantee the performance of the contract.
2. The cost of bid bonds are covered by an annual administration fee and does not depend on the number issued whereasthere is a cost for each and every performance bond issued.
3. A bid bond can get called into question if you are awarded a contract and you choose not to enter into it, and aperformance bond is used by a project owner if there is a default on a contract where a performance bond wasprovided.

Project owners will specify their security requirements at the tender stage. If a bid bond is specified and a contractor fails to provide one with their submission, the owner can and typically will disqualify the bid and award the second-lowest compliant bid.

Although owners may accept alternative security such as a letter of credit, contractors will almost always use a bid bond due to its many advantages over a letter of credit, most notably its non-impact on cash flow.

When a demand is made by the project owner under a Bid Bond, the surety company will begin an investigation surrounding the circ*mstances of the claim. In an effort to establish if the claim is valid, the surety will focus on answering the following questions:

1. Is the contractor or “principal” in default of their obligations created during the bidding process?
2. If liable, how and to what amount should the surety compensate the project owner?

Should the surety find sufficient evidence surrounding the claim, they will then compensate the project owner for the resulting loss. Typically, the amount of the loss is the lesser of the value of the bond or the difference between the defaulting party and the next lowest compliant bid.

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