Written by Richard Zehr
BBA, CAIB, President, Zehr Insurance
Contract Surety Bonds: The Big Picture
In Contract Surety there are three major types of bonds typically issued: Bid Bonds, Labour & Material Bonds, and Performance Bonds. Each bond provides unique protection for project owners and contractors, and each has its own claims process.
The goal of a contract bond is always the same — to deliver a completed project to the project owner.
The Role of a Bid Bond
A bid bond is a pre-qualification guarantee. When a project owner issues a tender, they require each bidding contractor to provide a bid bond — typically equal to 10% of the tendered price — as evidence of financial commitment.
It creates a legal obligation among three parties:
- The contractor (principal)
- The bonding company (surety)
- The project owner (obligee)
Its purpose is to ensure that the contractor who wins the tender will follow through and sign the contract.
When a Bid Bond Claim Occurs
A claim is triggered when the accepted contractor fails or refuses to execute the contract on the terms of their tender. Common scenarios include:
- The contractor discovers a pricing error and refuses to honor the tendered price
- The contractor withdraws their bid after tender closing but before contract award
- The contractor fails to provide the required performance and payment bonds after award
- The contractor becomes insolvent between tender closing and contract execution
In each case, the owner suffers a financial loss — typically the difference between the defaulting contractor’s bid and the next acceptable bid. That gap, up to the bond penalty, is what the bid bond covers.
Contractor Obligations to the Surety
Your obligations as the contractor to your surety during a claim are straightforward but important:
- Notify your surety immediately if any problem arises with your bid
- Provide a clear and honest explanation of the situation
- Supply bid worksheets, sub-trade quotations, and supplier quotes
- Do not withhold information or attempt to use the bond claim strategically
- Understand that your General Indemnity Agreement (GIA) allows the surety to recover any paid amounts
Your obligations to your surety are real and enforceable.
How the Surety Handles the Claim
After a claim has been initiated, the surety will work with both the contractor and the project owner to resolve the situation efficiently and move the project forward.
The surety may:
- Investigate whether the claim is valid
- Negotiate with the owner to reduce or eliminate the loss
- Facilitate acceptance of a corrected bid or re-tendering
- Pay the owner the difference between bids, up to the bond penalty
- Pursue recovery from the contractor under the GIA
Unlike a performance bond, the surety cannot complete the project, as no contract exists yet. The remedy is purely financial.
Information Required for the Claims Process
To facilitate resolution, the surety will require documentation from the contractor, including:
- All tender documents and completed bid forms
- Pricing worksheets, subtrade quotes, and supplier quotes
- A detailed written explanation of the alleged error
- Correspondence with the project owner after tender closing
- Information regarding the next lowest bid and price difference
- The project owner’s formal demand under the bond
Providing this information promptly helps keep the process efficient.
Keeping the Project Moving
The bid bond plays a foundational role in project completion. It ensures that the winning bidder will enter into the contract, allowing the owner to rely on the tendering process.
If the contractor does not proceed, the surety compensates the owner, making it financially viable to re-tender and move forward quickly with another qualified contractor.
Without a bid bond, project owners would face significant uncertainty and risk. The bid bond removes that uncertainty and helps keep capital flowing into construction.
Working with Zehr Insurance
At Zehr Insurance, we work with contractors to free up cash flow through surety bonds. Bond facilities are not limited to large construction firms.
If your company is financially strong and you are interested in exploring bonding options, please contact our office.
Call Zehr Insurance brokers and see if we can help you with your insurance needs.
