A bid bond is a legal agreement between the bond owner and the contractor for paying if any problem arises with the said project. It established a clear set of rules for the contractor to fulfill the stated obligations on a project.
A bid bond Canada costs between 5%-10% of the total contract price of the project, which comes to around a few hundred or thousands of dollars, depending on the valuation of the contract. The purpose is to assure the project proprietor that the highest bid will finish the job, and the presence reassures the client of a bid bond that the bidder does have the resources to undertake the project at the current proposal.
What Do You Mean by Bid Bond?
A bid bond ensures payment to the bondholder if the bidder cannot start the project. Infrastructure projects and other endeavors with comparable bid-based selection methods frequently use bid bonds. The key areas that define a bid bond are,
- A bid bond is a commitment that guarantees project contractors carry out the tasks they have committed to on a project.
- This type of guarantee offers the project manager both financial and judicial protection.
- Usually, bid bonds are presented along with the contract related to the project.
- Specialized surety firms supporting bid bonds promise that payouts will be fulfilled if the contractor doesn’t fulfill half of the arrangement.
- There are two additional primary categories known as performance and payment bonds.
Basics of Bid Bond
In Canada, the demand for bonds has been rising, with the offer prices increasing to 96.02. Hence, more people are investing in different types of bonds, and one such bond is the bid bond.
- It usually involves three parties: the surety, the contractor, and the bidder.
- The contractor is the developer or owner of the construction project, the bidder is the person who bid the highest bid for the project, and the surety is the agency or the company that issues the bid bond to the bidder.
- In Canada, it is issued by the Government of Canada Treasury Bills and Bonds Outstanding – Bank of Canada.
- Similar to the subscription for an insurance contract, the principal pays the guarantor for the bid bond at a specified cost.
- The highest value of damage that the surety will compensate with the bond is represented by the coverage value of the bond, also known as the penal or punitive sum. It ranges from 5-20% of the bidding price.
- A surety providing the bid bond in Canada must be a company licensed by the Government of Canada or an equal provisional insurance agency.
There has been a noticeable increase in the number of bid bonds issued by the government of Canada, which is more than 20% in 2021 from the previous year. Due to its security as it guarantees that vendors will carry out respective obligations under government contracts and that they’ll do so at agreed-upon pricing. Most government building projects in Canada call for the contractors to guarantee their offers by providing guarantees, which offer the client legal and monetary security.