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Performance and Payment Bonds for a Project With a Large Bid Spread




In public works there is an old joke; What is the definition of the low bidder?….The company that made the biggest mistake.  OK, we have told that joke before but we are just bond people, we don’t have a large well to pull from!  But what if the contractor really did make a big mistake?  What if it were a huge mistake?  As a contractor, what should you do? In the surety world, the rule of thumb is that a 10% or greater bid spread is of concern.  Of course, every circumstance, contractor, trade, and contract is different however the greater the percentage over 10%, the more concerned the surety.  Here are some steps on what a contractor should do.

  • Evaluate Your Bid – I’m sure it goes without saying, but a contractor should do this anyways.  Double and triple checking your bid estimate after the bid gives the contractor useful information.  By finding out possible reasons why the low bid is so much lower than the next will give the contractor insight and validity to his number.
  • Be Honest With Yourself – Every contractor thinks that they can make money on every project.  It’s part of what makes them so special, but can also cloud judgment.  Estimators make mistakes.  It’s OK, a surety company knows this as well.  The important thing is that the mistake or explanation is pinpointed so the contractor can make a decision on what step to take next.
  • Can You Overcome the Mistake? – Once the reasons for the bid spread are identified, the contractor needs to asses if he will still make money on the job.  And if he can make money on the job, does he even want to pursue it.  We recently had a contractor who was awarded a small contract, identified the mistake, and determined he could still make a small profit on the job.  However, he backed out of the contract because it would have been too much hassle for the pay off.
  • Can You Withdraw Your Bid? – If after assessing the bid and coming to the realization the contractor will lose money, the next step is to try and withdraw the bid.  There are laws that allow bidders to withdraw their bid, but each state is different so a contractor should research its rights ahead of time.  However, all public works entities award the jobs to the lowest responsive and responsible bidder.  It’s the ‘responsible’ part that allows a bidder to withdraw.  The time to withdraw the bid is very tight, so if and when a contractor is addressing a large bid spread, they should make a decision in the first couple days (each state has different laws but all require a bid to be withdrawn within just a few days). Remember, a public entity wants a project to run smoothly so most would gladly pay a little more money and go to the 2nd bidder if the low bidder has determined they made a mistake.  If the owner will not allow the bid to be withdrawn, the contractor should consult an attorney immediately to discuss options; and remember to get your surety professional involved as well.
  • You Have Determined the Spread Can be Overcome – After the contractor has evaluated the bid, determined possible reasons for the low number, and decided to pursue, the contractor should be prepared to explain this to the bond company.  Put in writing, everything the contractor has already done; it tells the story to why his bid is so much lower the rest.  In addition, he should be prepared to provide a detailed job cost breakdown.  If the spread is attributed to a certain trade, requiring that subcontractor to bond back can mitigate the risk and sometimes may be required by the surety company.

At the end of the day, a surety company provides performance and payment bonds for contractors based on their creditworthiness.  If the contractor has the business and personal financial strength to warrant the bond, most surety companies are going to support the large bid spread, after a proper explanation. It’s the contractor’s business, after all. But by taking these steps after a bid spread, it not only provides comfort and builds trust with the surety company, it will lead to a more profitable (or less costly if it goes the other way) job once the contractor has identified it’s mistakes.

We love talking bonds. If you have any questions about this issue or others, call us at 877-654-2327




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