Many people, including some in the construction industry, mistakenly believe that the contracting process for residential projects is nowhere near as rigorous as the process for bidding on and executing public works projects. It’s easy to see why you might think that, especially if your experience has been primarily in government contracting or residential remodeling jobs for individual homeowners.
But “residential” construction doesn’t always mean the client is a single homeowner. A great deal of residential construction work is done for subdivisions or owners of large, multi-unit apartment or condominium complexes. In these cases, there may be a lot of private investors’ money involved. Whenever “other people’s money” is being used to finance a construction project, whether those people are taxpayers or private investors, the contracting process tends to be formal and entail surety bonding throughout. That’s the kind of bidding process addressed here.
Requests For Proposals & Bids
The contracting process for large-scale residential projects typically begins with a request for proposals or bids. The project owner will select the proposal or bid that best meets the selection criteria established for the job: the lowest price, the most impressive qualifications, or the best value, which is based on a weighted ratio of price and qualifications. You may not know what method the project owner will use in evaluating proposals or bids, so assume that your bid package needs to demonstrate the ability to deliver high quality results at a reasonable price.
What are Bid Bonds and Why Would I Need One?
Developers know that contractors must balance the need to come up with a low enough bid to give them a good chance of landing the job while still making a decent profit on it. And they know how difficult that balancing act can be. It’s not unusual for a contractor to realize only after submitting a bid that the job can’t be done for the bid price without compromising quality. In such cases, it’s possible that the contractor will turn down the job if selected as the winning bidder.
Imagine where that leaves the developer. Consider the time and effort that went into preparing the RFP, advertising it, reviewing a potentially large number of proposals or bid packages, and coming to a decision. From beginning to end, that process can take months. Every month that a project completion date gets pushed back is another month that investors are carrying the costs of the project. Having to start the contractor selection process all over can be a significant financial burden.
That’s why many residential developers are now doing what has long been the norm with public works projects: requiring each bidder to obtain a bid bond as a condition for submitting a bid. They also may require a performance bond and payment bond before signing a contract with the winning bidder.
How Does a Bid Bond Work?
A bid bond is a contractor’s promise to accept the job if chosen as the winning bidder. It guarantees that the residential project owner won’t suffer financially if the bidder can’t keep that promise. If the contractor turns down the job, for whatever reason, the project owner can submit a claim against the bond.
If the underwriter that issued the bond (the surety) determines the claim to be valid, the surety will pay the claim initially. But surety bond contracts include an indemnity clause that obligates the principal (the bidder) to reimburse the surety.
How Much Does a Bid Bond Cost?
The contractor will pay only a small percentage of the total bond amount required by the project owner. The surety will determine that percentage, the premium rate, based on the contractor’s personal credit score and personal and business financial strength. If your credit is good, that means you’ll pay between 1% and 3% of the bond amount to obtain the bond. But bear in mind that if you don’t live up to the terms of the bid bond, you’ll have to be able to cover up to the full amount of the bond.
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Contractor Surety Group is your source for the construction bonds you need to obtain as you continue to seek new projects and grow your business. Fill out our online application form today to get started.