Throughout the United States, in all 50 states, most, if not all municipalities, and the Federal Government, public bidding is the preferred delivery system for awarding construction projects. A construction project is needed, a government agency puts it out to bid and the low bidder is awarded the job. An old joke in the public works arena is:
Q: What is the definition of a low bidder?
A: The Company that made the biggest mistake.
The system works, tax payers get a construction project that was competitively bid, not given to the brother-in law of the mayor or awarded to the biggest campaign contributor.The taxpayers know they are getting a project at a fair price because it is an open forum; no back room deals, no undue influence, if you are the low, qualified contractor you get the job. As good as the system is, the only reason it works, is because bonds are required on public works projects. The three types of surety bonds routinely required on public works projects are:
- Bid Bonds : This bond guarantees that the low bidder will enter into a contract if awarded the contract. If the contractor cannot enter into the contract, the bond potentially covers the bid spread between the first and second bidder.
- Performance Bonds: Guarantee that the project will be delivered per the specifications.
- Payment Bond: Guarantees that all subcontractors and suppliers on the project will be paid. As one cannot place a lien on public property, this bond provides a payment guarantee.
All three of these bonds are financially backed by the surety company. The greatest service the surety companies provide, however, is pre-qualification of the contractor. As an entity independent of the government agency, and one putting significant dollars at risk, the public is assured the contractor is qualified to take on the project. If the surety company was wrong and the contractor cannot complete the project, or cannot pay its sub-contractors and suppliers, the surety company, not the tax payer will make it right.