Bid Bond Insurance – What You Need To know

Bid Bond Insurance – What You Need To Know

Put simply, a bid bond is a guarantee made by a contractor to protect project owners from contractors not starting or finishing a job. Bid bonds are required from contractors on all sorts of projects including public and private construction projects. 

Like most financial instruments, figuring out a bid bond can be confusing. You might find yourself trying to understand a lot of jargon with no real explanation of what a bid bond actually is. Our guide will help you find clarity.

What is bid bond insurance?

A bid bond is a guarantee that the bidder provides to the project owner, to effectively demonstrate they have the financial means to successfully complete the job. If a contractor does not complete a project, the property owner can trigger the actual bond to ensure the work is completed. 

By requiring a bid bond, the owner can be better assured that the bidder has the financial means to complete the job. This ultimately helps the project owner feel more comfortable, as a bid bond helps to confirm that the contractors are financially capable of completing the project. 

This kind of bond is beneficial to the industry and property owners because it reduces the number of frivolous bids. With bid bonds, contractors are less likely to exaggerate their capabilities or financial abilities. They will also be less likely to drop out or change their minds.

How do bid bonds work?

A bid bond is an agreement that involves three parties. These parties consist of the obligee, the principal and the surety. 

  • The Obligee: This is the developer or owner of the construction project that is up for bid. 
  • The Principal: This is the proposed contractor or bidder wanting to do the work. This may be one person or a company.
  • The Surety: the financial agency that can issue the bid bond to the principal.

Because of the high costs and risks involved in major construction projects, they can sometimes contain complexities not found in other lines of work. This is why bid bonds are generally used for construction projects. The principal will purchase a bid bond at a set price from a surety like Intact, Aviva, Travelers etc. through insurance brokers such as ALIGNED Insurance.

A bond cannot be granted, however, without the contractor undergoing some background checks first. The surety will look at a construction company or contractor’s past history, liquidity and reputation, the same way a bank would look at a customer’s credit score before issuing a credit card or loan. The insurance company/surety has to be confident that the principal has adequate ability and means to finish a project. 

Requirements to bid bonds

You often must submit a bid bond for any public projects and increasingly, more contract owners in the private sector have started requiring them as well. This kind of bond is vital if your construction firm wants to stay competitive in the industry. Bid bonds are also necessary when applying for certain permits and licences.

Some of the requirements and costs when requesting a bid bond include: 

  • The principal (contractor) is responsible for purchasing the bid bond. The cost of a bid bond depends on a number of factors including the full cost of the project, the province and specific jobsite location, and the contractor’s financial history.
  • For major construction projects the cost (or premium) of the bid bond is based on numerous factors including, but not limited to: 
    • The contractors working capital
    • Projects already underway
    • Size of the project
    • Type of project
    • Experience and expertise working on similar projects
  • The surety will need to review the principal’s credit history, financial records and industry experience. If you’re a contractor, you may even want to use a certified public accountant (CPA) who specializes in construction accounting to better prepare your financial statements as this could give your company a higher chance of winning the bid and being eligible for a bid bond. Projects, especially larger ones, will need to review personal credit and industry experience. You may even want to use a construction-specific certified public accountant (CPA). This will give you a higher chance of approval
  • In the bid bond application, the contractor is required to give details on the potential job. This includes expected profits and a cost breakdown of labour, materials and subcontractors.

How to find the right bid bond

For you, your business and your bid to succeed, you need a bond provider who knows what it takes to win a bid and will guide you through the process. 

The right bond provider will accurately evaluate the bond requirements of the contract and help you meet them.  They should also advise you of any potential risks and how to protect yourself against any bond claims.

Finally, your bond provider should make sure the terms of the bid bond are clear to all parties involved. 

This is when ALIGNED Insurance comes in…

ALIGNED Insurance is recognized as one of the best insurance brokers in Canada. Our cost-effective services, teamed with tailor-made insurance and a core value to help others means you and your finances will always be in good hands.

In addition to these, ALIGNED can offer: 

  • Priority claims as an existing client: Unlike some other companies, we won’t give all our perks to potential clients. Claim costs will be kept to a minimum
  • Expertise through and through: You will be dealing with those who are experienced in the field of business insurance. Our excellence shines through our services, products and the results you get
  • Optional fixed fee based model: Unlike competitors we may offer a fixed-fee compensation model that can help dramatically reduce bond costs and help you win more work!
  • Service guarantee: If we don’t quite achieve your desired goal, a portion of your money will be given back to you

At ALIGNED we know how stressful financial matters can be, we aim to make it as swift and simple as possible. Through a high-quality service, we’ll focus on your specific needs, being thorough with each detail. 

Contact us today! 

A bid bond doesn’t just help project owners feel protected but can help establish contractors in their profession. If you are serious about your project, then getting a bid bond is a wise move, and minimizes risk. 

Call ALIGNED Insurance today for all your bond and insurance needs.

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