A bid bond is replaced by a performance bond when a contractor accepts a bid and proceeds to work on the project. A performance bond protects a client from a contractor’s failure to perform according to the contractual terms signed. In the event that the work done by a contractor is poor or defective, a project owner may make a claim against the performance bond to provide compensation for the cost of re-doing or correcting the subpar job.
The amount claimed against a bid bond typically covers the difference between the lowest bid and the next lowest bid. This difference will be paid by the bonding company or surety which may sue the contractor to recover the costs. Whether the contractor can be sued by the surety depends on the terms of the bid bond.
While most project owners typically require between 5% and 10% of the tender price upfront as a penalty sum, federally funded projects require 20% of the bid as a penalty sum. The cost of the bond depends on a number of factors, including jurisdiction of the project work, bid amount, and contractual terms. A contractor that is making a $250,000 bid to provide roofing for an elementary school will have to submit a bid bond of $50,000 along with his proposal to be taken seriously as a contender for the federal contract. Therefore, a bid bond also helps to avoid frivolous and unserious bids, saving the client time in analyzing and choosing a contractor.
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