Bid Bond – Contract Bid Bonds
Last Updated: August 12, 2017. We are the leading provider of Bid Bonds in the nation. We say that with a bit of pride, and a bit of humility because we know that it’s really you, our customers, that make us who we are.
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So what is a bid bond? And why do you need one?
The simple reason is that you need one in order to get the work. But the bigger question is why are more owners/developers requiring a bid bond? The simple answer is risk. Given the uncertainty of the marketplace, which includes long-time contractors closing their doors, to municipalities filing bankruptcy (or just slow paying), has led to the owners being afraid that their contractors will be unable to complete the job. So, they require a bid bond.
A bid bond is issued as part of a bid by a surety bond company to the project owner. The owner is then assures that the winning bidder will undertake the contract under the terms at which they bid.
Most bid bonds contain a cash deposit, which is subject to full or partial forfeiture if the winning contractor fails to either execute the contract (or come up with a payment bond or performance bond – depending on how the bid process is structured). The bid bond assures that, should the bidder be successful, they will sign the deal and provide the required surety bond.
The Bid Bond prequalifies the principal and provides the necessary security to the owner or general contractor, or “obligee,” guaranteeing that the principal will enter into the contract, if it is awarded.
How does a Bid Bond work?
A Bid Bond guarantees that the “obligee” will be paid the difference between the principal’s tender price and the next closest tender price. This action is only triggered should the principal be awarded the contract but fails to enter into the contract, as agreed, with the obligee. The penalty on a bid bond is generally ten percent of the tender price of the bidder. Contractors really prefer to use Bid Bonds as they are a less expensive option than others available. They also do not lock up cash or bank credit lines while the bidding process is ongoing. General Contractors and Owners also like to use Bid Bonds for the reason that they establish and endorse that the bidding contractor (or supplier) is supported by the financial backing of a Surety Company and is, therefore, qualified to tackle the project.
How Do I Get a Bid Bond?
Some more explanation on Bid Bonds
On our Performance Bond page, we started explaining bonds, which we continued on our Contract Bond page. We are continuing from our earlier description of bond rejections.
Fraud/Theft and other Bad Acts
So how do we deal with prior problems? Especially those that deal with dishonesty or fraud? Well, we deal with this head on. First, a couple of very pertinent points about the surety bond industry. The bond industry wants to writ e a bond where they take no risk. That is, the contractor is the party that should be looked to. However, in the case of an employee that has a past problem, the contractor is asking the bond company to overlook that, very obvious, risk. Underwriters are leery to do so.
Specifically, the underwriter wants to eliminate risk. That is, like a life insurance policy, they don’t want to write a large policy on a person with terminal cancer. In a like manner, a bond company does not want to writ e a surety bond on a contractor that has, in the past, absconded with lots of funds and spent time in prison.
Still, we do get these cases. We deal with them by showing the bond company how that risk has been eliminated or mitigated. That is, we disclose the prior bad facts. Then, we show how the current situation is different – from both a personal standpoint as well as a business standpoint. Let’s try an example.
Let’s assume that a general contractor has a minority owner (say 25%) that was previously found guilty of defrauding the federal government. That person didn’t spend any time in jail, but had to make restitution to the government. So, we’d disclose that fact. Then, we would show how the minority owner had no access to the funds of the company as those would go through another party and be verified by yet another department. Next, we would go on to show that the minority owner was limited to helping the company in its operations. Finally, we would show how the minority owner was not able to have any part of the bidding processes of the company and how the company limited access to any contracts/bid/reports to parties totally outside the minority owner’s sphere of influence.
Drugs, Alcohol and Gambling
These are the typical vices that have ensnared many victims throughout the ages. In fact, many investigators state that when they find evidence of one of these vices, the others are sure to follow. So, let’s disclose how damaging these are to the applicant.
Gambling. Unfortunately, an addiction to gambling is death to any bond application. However, the fight almost always surrounds “what is an addiction?” In our current society, the ability to gamble is much more readily available than in decades past. Not only is travel to known gambling destinations (Las Vegas, Atlantic City) cheap, but there are now many places that are locally available that service gambling customers (not including the Internet). However, most underwriters can easily detect the difference between serial gamblers and those that occasionally dabble. Thus, serious gamblers typically have some sort of credit flag that comes up. Whether it’s a large credit line set up with a casino or a large credit charge on another credit line that has been charged to a casino.
Drinking. From a personal perspective, I have seen more clients destroy themselves by drinking than by any other vice – by a factor of ten. However, drinking is more accepted by society and, thus, is more easily overlooked by underwriters (it’s always good to remember that underwriters are people too). Unless there is something else, like a conviction for operating a vehicle under the influence or something similar, it is rare to have drinking create a huge problem in the underwriting process.
Drugs. Drugs are a very hard category to define. If drug usage comes out about an applicant, it can be difficult to know how the underwriter will handle the issue. Many underwriters have little concern about marijuana (especially given the changes in society attitudes and the relaxing of laws against marijuana in certain states – like California and Colorado). Other drugs, such as cocaine, crack or methamphetamines are very frowned upon while prescription drug abuse can be overlooked. Still, these are generalizations as each underwriter has their own personal feelings – which can easily sway the bond approval process.
Large Debts and Living above your Means
We have found that our clients are extremely disturbed when they are turned down because their personal debt load is considered too high. The argument that we get back goes something like this “hey, my company is in great shape. What do they care about what I do with my personal life? That should not be a consideration for them.” It’s not unusual that this is said at an above-average volume level.
Unfortunately, bond underwriters have learned over the years just how important the personal finances of the principal being underwritten, or the main owner of a company being underwritten, really can be. I am many times surprised at the poor financial condition of an owner of a very successful company. I think that the lack of financial progress is a symptom of the entrepreneurial spirit. That is, the same traits that help someone create a company, such as risk-taking and putting all their eggs in one basket, are the same traits that keep them from creating a strong personal portfolio.
So why do bond underwriters care so much about the personal finances of the principal? It’s really simple. The principal has control over the company and the finances. Thus, if their personal finances start to falter, they have a tendency to continue to draw more and more money out of the company (whether on a real or relative basis), which deteriorates the financial ability of the company to make good on any bond. Thus, it is the relative power of the principal and their control that determines the finances of the company. Given their importance within any enterprise, it is the principal’s control that determines the effective actions of the company. Even the strongest executives must bow to the pressures exerted by the guy in charge. Even if they resist for a short time, they will inexorably bow to the principal’s wishes over time.
Bad or nonexistent references
There are a variety of ways that bad or nonexistent references can hurt a principal. First, there are the references that are not able to be contacted. Their phone calls are not returned, emails are ignored, or the worst is if any mailing is returned. Obviously, this reference is stale – at best – or fictitious at worst. In either event, this type of reference will usually spell doom for any bond issuance.
The more common references that hurt a principal are those that are bad or lukewarm. The bad references show a general lack of understanding on the part of the principal. That is, providing a bad reference is typical of those principals that do not understand the relationships around them and, consequently, do not have the general type of support that many businesses need to survive. A lukewarm reference can be equally bad. Thus, the reference person is generally responsive, but they do not provide much in the way of positive reviews of the business or its products or services. Thus, the surety bond underwriter can get a feeling of insecurity about the business and not write the bond.
We always suggest talking to your references, making sure that their contact information is up to date and know in advance what they will say when called. If they do not agree to give an unqualified reference, then do not use them. As, specifically, for an unqualified reference.
Strangely, the beefing up of a resume, or business history and contacts, is on the rise. You would think that it would be decreasing as the ability to verify this has been greatly eased with the use of the Internet and other digital tools. However, we still see many cases where someone has decided to change their resume to add additional titles/jobs/employers as they think that the cachet helps them more than the risk hurts them. It doesn’t take look to do a search and find someone that has been hurt after they have unjustly padded their resume. For example, Robert Irvine of Restaurant Impossible (who I really enjoy watching) was caught having embellished his resume and, consequently, receiving a lot of negative attention and even a loss of income.
But many people just do not believe that they will get caught. Further, they believe that the risk of getting caught is low (and it is, relatively) while the benefits can be extraordinary. That is, if a contractor could get a job with the largest employer in town – even if just a small job – they believe that they could take that experience and enhance it. For example, let’s assume that a contractor gets a job building a small auxiliary building at General Electric’s plant for a total cost of $200,000 (as I said, a small building). But on their curriculum vitae, they state that they were the general contractor that created a large complex for GE, which in turn led to an increase in GE’s productive capacity. Who wouldn’t want to hire that contractor? But if you knew the actual truth, well, you may not be in the same situation.
If a bond underwriter ever discovers this type of resume padding, they certainly will refuse to write the bond.
Social Media and Online Presence
You would be surprised by how many people are undone because their online presence reveals something negative about them. This, in turn, creates uneasiness in the bond underwriter who uses this as a justification to refuse to write the bond. In this way, a negative Twitter post can have significant repercussions.
What’s difficult about this is that it is hard to keep a pristine image online. Even the most successful businesses with the best reputations will receive a negative review now and then. Even during a successful job, a construction firm can get dinged with a negative review even though the client ends up being happy. Sometimes, during a job, an architect, subcontractor, owner or somebody else gets frustrated – whether due to the perceived slowness of the job, cost overruns, and delays by the government, etc. It doesn’t matter the source, all that matters is the outcome – a negative post.
So, how do you combat this? I think that a good marketing campaign is a good idea – not just for dealing with negative reviews, but to also get new business. As an integral part of your marketing campaign you should have someone who is in charge of social media and online presence. Then, a focused and disciplined approach will help you out. Posting with regularity on Twitter, Facebook and Google Plus is a must. Also, be sure to do a search on your business. It only takes a couple of minutes.
Be sure that you Better Business Bureau information are up-to-date, and Angie’s list if that applies to you. It’s not always practical to think that any negative post will get removed and, quite frankly, it looks a bit suspicious if there is never a negative thing out there. Instead, you should be sure to put out as many positive things about yourself as possible. Then, any negative posts or comments are seen in a balanced light.
However, there are companies out there that help delete any negative comments. You can also search around for a good cease and desist letter and send it to the offending web site’s webmaster. This is usually a cheap and easy way to remove any negative comment. One caveat: be really nice about this. Several businesses have been raked over the coals in the Internet when they have used heavy-handed approaches to removing bad information. Be very polite and funny even. Remember, most of the savvy social media users are younger and have different concepts about the world.
We consistently ask our bond companies for the rationale behind why they decided against writing a bond. Because we do this consistently, they are not offended by the questions. We do this so that we can learn several things. First, we want to always keep a handle on what each particular bond company is doing. By asking for any rejection reasons, we keep a good pulse on them and whether they are tweaking their underwriting criteria. Next, we definitely want to have an answer when our clients come and ask us about why they didn’t get a bond. Yes, we are super-successful in getting bonds placed. This sometimes leads to the perception that we are perfect and never get a bond rejected. We wish that were the case.
Unfortunately, many times people are not quite so, ah, gracious, when their bond application is denied. Thus, they immediately start to accuse of bias and create an atmosphere of hostility. Principals are upset that they have to spend time and effort to get another bond. Employers are upset that their employees were rejected and, gasp, that they would have to find another employee (the effort for looking for another employee seems to outweigh the fact that the employee was unfit for the position). Finally, we know of many bond companies that get contacted by attorneys that are objecting to the rejection and seem to be saying “hey, I’m an attorney and I could sue, so please give them a bond.” Attorneys like this as they get paid good money, but I am unaware of a time when a bond company actually changed its mind after being contacted by an attorney.
See more on our performance bond page.
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