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Why so Much Information is Needed for Bid Bonds or Payment and Performance Bonds

Contractors doing business in public works understand there is a lot of paperwork required to successfully submit a bid.  And beyond that, getting a bond line established with a surety company can sometimes be a time consuming process. Unfortunately it doesn’t end there. Once a contractor has bonding established, there is still a process for requesting each bond.

Contractors we bonded

Making Bonds Easy

Just to get a bid bond, or a performance and payment bond, the bond company generally requires a lot of information. Why?  We will discuss in this blog.  But before we do let’s point out that there are generally three types of bonds a contractor will see in a public works project and define each (usually only a performance and payment bond if a subcontractor is bidding to a prime):

  • Bid Bonds – To ensure the bid was submitted in good faith and that the contractor will enter into contract if selected as the awarded bidder
  • Performance Bonds – Guarantees that the contractor will perform the construction to the specifications of the contract
  • Payment Bonds – Guarantees that the contractor will pay subcontractors and suppliers what they are owed.

Let’s start with the bid bond.

Bid Bonds
When a contractor submits a request for a bid bond to its surety professional, there is a form that needs to be completed, or information that needs to be given.  A partial list includes bid date, obligee name, bid bond %, bid amount, liquidated damages, warranty period, completion time, description of work, estimated profit, is there a required bid bond form?, etc.

So why does the surety want and need this information in order to make a decision?  As described above, if the surety company issues the bid bond, it has prequalified the contractor; that is the surety company plans to write the performance and payment bond if the contractor is the awarded bidder. And remember, the performance bond is the guarantee to the public entity that the contractor will fulfill its obligations.  The surety would only make such a guaranty if it knew what it were bonding.  Hence, the surety needs to know what those obligations will be such as completion time, type of work, liquidated damages, etc.

The good news is that if the general contractor is in fact awarded the job, the only additional information a surety usually needs is a copy of the contract, bid result and bond forms. This is because the surety already asked for the specifications during the bid bond process.

Performance and Payment Bonds
Most of the time, General Contractors that require bonds from its subcontractors do not ask for a bid bond.  They simply require the performance and payment bonds after award. As you can gather from the bid bond section above, the surety company will need the same information to make a decision.  It will want a copy of the contract and bond forms, but also ask for a form that summarizes that same key information: completion time, warranty, liquidated damages, etc.

How to Make It Easy

  1. To start, make sure you are working with a bond only agent who has the expertise.  An insurance agent that also does bonds is doing it as a compliment to the insurance, and usually doesn’t understand the process. This will ensure any information requested is actually needed.
  2. Understand the surety’s role.  The surety is an extension of your company, vouching for your work.  But at the end of the day, it’s the contractor’s assets that are on the line (click here to read about indemnity agreements).  The surety is like having a business partner.  The underwriter asks for the information to ensure the contractor is not agreeing to a bad situation.
  3. Accept the process.  For a bid bond, certain information is required and needed. For performance and payment bonds, certain information is required and needed.
  4. Do it a few times.  Like anything, going through a process with many steps gets easier the more you do it. After being set up for a bond line, the process of requesting bid bonds and performance and payment bonds is easy after a while.

Please call us or contact us if you still don’t understand why a surety requires so much information. Our job is to make it easy for you, and if this blog doesn’t clear that up we want to hear from you.

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