Construction Bid Bond with Performance and Payment Bond - YouTube

Welcome to the MEP Academy. In this video we're  going to talk about when are bonds required.  

What's the difference between a bid  bond or performance and payment bond,  

and how much do bonds cost.

Welcome to the MEP Academy in this video we'll  discuss bid bonds and performance and payment  

bonds. So what is a bid bond? Basically when  you're bidding a project that requires a bid bond,  

it's because the owner wants you to guarantee  that you're capable of fulfilling the contract  

requirements, and that you'll be able to secure  a performance and payment bond. Usually a bid  

bond will roll into a performance bond.  So what happens if you back out of a bid  

where you were the successful low bidder, and  for which a bid bond was issued on your behalf?  

if you're the low bidder and you decide not to  execute the contract, and you want to back out,  

and you provided a bid bond to bid the project,  

the owner will file a claim against you and  your surety company, your bid bond company. If  

you're a small company, most likely you put up  some form of collateral or personal guarantee.  

You're personally and financially  responsible for the cost difference  

for the owner to secure the next lowest bidder  up to your bond amount. So if you bid a $100,000  

and the next lowest bidder was a $110,000  and your bid bond was in the amount of 10%,  

your liability is the difference between your  bid and the next lowest bidder which makes you  

liable for the $10,000 difference if  you decide not to execute the contract.  

So, if you back out, you're liable to your bond  company for the claim amount plus attorney fees.  

So, they can come after you if you don't pay the  claim amount and the attorney fees. Read your  

contract to determine your liability exposure.  It's almost better to perform the contract  

knowing you're going to take a loss, at  least you might be able to mitigate the loss  

with careful planning and great project  management, while hopefully there will be  

change orders allowing you to recover some of  the loss incurred on your original bid amount.  

Bid bonds are usually in the range of 10%,  but can vary depending on the contracting  

authority. The bid bond percentage  will be indicated in the bid documents.  

Again, to reiterate, if you back out and you made  a personal guarantee, then your personal assets  

could be at risk. So, you want to read the fine  print. You want the bond company to explain to you  

the terms and conditions of the bond. Often  there will be alternatives to a bid bond,  

such as submitting a cashier's check,  certified check, or money order,  

or some other asset that can make good  on your promise to execute the contract.  

If you're the low bidder, other assets that  might be considered, are liquid assets,  

that is something that can be converted into  cash easily. When are bid bonds required?  

Most likely on all your Federal,  State and Local Municipality projects.  

Are bid bonds required on privately held or  funded projects? Well, a lot of projects are  

now requiring bid bonds. We've seen as the larger  the project gets, the greater the chances will be  

a requirement to bond a project. If you're  going to be bidding in the Government sector,  

or within the larger private sector projects,  then you need to build up your bonding capacity.  

You can't just start a company, expect a surety  company to issue you millions of dollars worth  

of bonds on your behalf unless you back it up  with collateral, or have established record of  

completing bonded work, and have the area of  experience required to complete the proposed  

project. The bonding company will also track how  much bond exposure you have already outstanding.  

This is for any work which is currently under bond  coverage, and for which is yet to be completed,  

releasing the bond of any further risk. So,  how much do put in bonds cost for projects over  

$400,000, and this number can change depending  on your bid bond company. The bid bond could be  

free if you have a good relationship with your  bond company, then it's possible there won't  

be any charge for smaller projects, there may be a  nominal fee of say a $100, a couple hundred bucks.  

It's possible they have an annual fee which covers  all the bid bonds you will need for the year,  

but check with your bonding company.  Discover how they structure their fees. So,  

what happens if you submit a bid without a bid  bond on a project that requires a big bond?  

What will they do even if you're low bidder?  

Your bid will definitely be rejected, they will  not accept your bid even if you are low bidder.

So, now what are Performance Bonds?  

They're used to ensure the project gets completed  according to the construction documents.  

The bid bond usually also guarantees that  your surety will issue a performance bond  

if you're the successful, responsible low bidder.  But unlike the bid bond, the performance bond  

will definitely cost you some money. This is  where the surety company gets their money,  

especially if they offered you the bid bond for  free. They know that following a successful bid,  

you'll need to pay for the performance  bond. Now a Performance Bond in place,  

what happens if you fail to perform under  a performance bond? You've gotten this far,  

and you have been executed your contract, that  is you sign the contract, and are now required  

to perform. If you don't perform then the bonding  company will pay to have the project completed  

on your behalf. So, your bonding company will  either pay out to the owner or general contractor  

whatever it takes to finish the project that  you were contractually obligated to finish.  

The bonding company may pay another  company to finish the contract,  

but may risk having to pay more than  what the original bond amount was, is.  

Maybe you file bankruptcy, or something. They  will make your surety company pay to complete  

the project. You can see why the surety companies  want to make sure that you have the experience,  

and financial resources required to complete  the project you are attempting. And so,  

what are payment bonds? So, we have bid bonds,  performance bonds, and now we have payment bonds.  

The payment bond is usually coupled with the  performance bond, so you have a performance and  

payment bond. The payment bond ensures that you  pay those who provide material or labor on your  

behalf for the proposed project. They want to be  sure that you have paid all your subcontractors,  

equipment and material suppliers, including  all the labor used on the project that the  

bond was issued for. So, how much  does a performance and payment bond  

cost? Performance and payment bonds are often  issued as one bond except in some locales  

where maybe it's just a performance bond. Bond  rates can vary from less than 1% up to 2% or more  

depending on the contract amount, your  experience, and your credit rating. For example,  

let's say that you have a construction  contract in the amount of $100,000  

and your bond rate was $7.00 for every $1,000 of  contract amount, or stated differently as 0.7%  

of the total contract amount. So, your cost  calculation could be one or two of these methods.  

One, take the $100,000 divided by a $1,000  to give you how many thousands there are. So  

a $100,000 in contract amount divided by a  $1,000 gives you. There's a hundred thousands  

in the contract, a hundred times $7.00/$1,000 of  contract gives you $700. It's easier the other  

way. So the second calculation is just take the  $100,000 contract and multiply that by point 0.7%.  

Both ways are going to give you $700,  at a seven dollars per thousand rate  

or a point seven percent rate. It's going to cost  you $700 for that performance and payment bond.  

If you are just starting out then your bond rates  will most likely be higher than this amount,  

but as you gain experience and grow your credit,  your rate can eventually be lower than this, but  

check with your bonding company for the rate  structure. So how do you qualify for a bond?  

Some companies may require to have  the owner pledge a personal guarantee.  

That is the small company owner personally  guarantees to reimburse the bonding company for  

any claims against the bond. So, you really want  to think this through if you're a small company  

and are thinking of securing a bond for a project.  You want to make sure that you have all your costs  

covered and you have an experienced  team to execute the contract documents,  

including the funds to pay for the  project, as often your accounts

payable will exceed your accounts receivable. That  means you will have to pay most likely some of  

your bills before you receive money from executing  the contract, but if you can stay ahead of your  

payables, meaning you're collecting more money on  your contract than you have to pay out then you  

won't have to worry about financing your project.  So, if you're a small company it's possible you'll  

have to provide a personal guarantee and if you're  married then your spouse might also be required to  

sign the guarantee. But, check with your bonding  company or shop around for the best terms and  

conditions. Large companies usually qualify  based on their credit rating and experience,  

so until you get some experience and establish  some credit behind you, you may have to give a  

personal guarantee. So in summary the bonds  are basically insurance that you will do  

what you said you would, and that is to  execute the contract if you are low bidder  

and pay all those who helped you build the  project, whether that was your subcontractors, or  

the vendors that sold you equipment and materials,  and the workers that perform labor on your behalf.  

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