Liga Asuransi – Dear reader, how are you? It seems that we still want to continue our discussions about risk management and insurance around the construction industry, this is in line with the current fast development of the construction industry.
As we keep saying the risk of construction is high, then it is necessary to know more deeply about the potential risks that exist thus can be anticipated from the earlier stage.
The most interested parties to Bind Bond is the project owners.
As an insurance broker and consultant focused on the Engineering Procurement and Construction (EPC) industry, we want to share our knowledge and experience so that you and your clients can avoid project losses and failures.
There are 2 types of risks of construction that we need to pay attention to, namely financial risk and physical risk.
The financial risk is loss due to fines, penalties, and other costs resulting from failure to meet commitments to the employer.
Physical risk is damage and physical loss because of an accident guaranteed in the insurance policy.
This time we only focus on financial risks, especially because of the project tender process, namely Bid Bond.
We hope that this article will be useful to you. If you are interested, please share it with your colleagues so that they also understand you.
What is a bid bond?
A bid bond is a type of construction bond that protects the owner or developer in a construction bidding process.
The function of the bid bond is to provide a guarantee to the project owner that the bidder will complete the work if selected. The existence of a bid bond gives the owner assurance that the bidder has the financial means to accept the job for the price quoted in the bid.
A bid bond is typically obtained through an insurance broker, such as an insurance company or bank, and it helps guarantee that a contractor is financially stable and has the necessary resources to take on a project. Bid bonds are commonly required on projects that also involve performance bids and payment bonds.
Bid Bond Basics
A bid bond typically involves three parties: the obligee, the principal, and the surety. The obligee is the owner or developer of the construction project under bid. The principal is the bidder or proposed contractor. The surety is the insurer or bank that issues the bid bond to the principal.
The principal purchases the bid bond from the surety for a set price, much like a premium for an insurance policy. The coverage value of the bond is called the penal sum and represents the maximum amount of damages the surety will cover with the bond. Penal sums can range from 5 to 20 percent of the bid amount.
The main points of the bid bond:
- A bid bond is a legal agreement that ensures contractors fulfill their stated obligations on a project.
- This form of assurance provides both financial and legal recourse to the owner of the project.
- Bid bonds are usually submitted in conjunction with the project’s contract.
- Bid bonds are backed by specialized surety companies (insurer and bank) that guarantee the payments will be made if the contractor fails to uphold their end of the bargain.
How Bid Bonds Work
Bid bonds help to prevent contractors from submitting frivolous or inappropriately low bids to win a contract.
During a construction bidding process, various contractors (principals) estimate what the job will cost to complete, and they submit their price to the owner (the obligee) in the form of a bid. The contractor who wins the bid is given a contract for the project.
A bid bond serves as a guarantee that the contractor who wins the bid will honor the terms of the bid after the contract is signed.
If the contractor fails to honor the terms of the bid—for example, he raises his price for the job after the contract is signed—the contract may be broken and the owner will have to find another contractor for the project, presumably the next-lowest bidder.
A bid bond compensates the owner for the cost difference between the initial contractor’s bid and the next-lowest bid. Sometimes, the surety issuer sues the contractor to recover these costs, depending on the terms of the bond.
How Much Will a Bid Bond Cost?
The cost of a bid bond—the premium paid by the contractor to the surety—is based on several factors, including the cost of the project (bid cost), the location of the project, the owner, and the financial history of the contractor.
For small projects, bid bond premiums may be a flat fee or minimum premium/fee. For larger projects, the bid bond premium usually is based on a percentage of the total project cost and the penal sum of the bid bond.
Bid Bond Requirements
Under Law No. 5 of the 1999 Republic of Indonesia, all bidders are required to submit bid bonds on any government project.
Many private firms also adopt this requirement to protect themselves from risk during the bid process.
Getting a surety bond is very important if you want your company to become competitive in the construction industry. In some areas, a surety bond is required to obtain licenses and permits. Most importantly, almost all project owners and developers require a bond from you before you can bid on their projects.
Without bid bonds, project owners would have no way of guaranteeing that the bidder they select for a project would be able to complete the job properly. For example, an underfunded bidder might run into cash flow problems along the way. Bid bonds also help clients avoid frivolous bids, which saves time when analyzing and choosing contractors.
Requirements for Bid Bonds
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. The cost of the bond depends on several factors, including the jurisdiction of the project work, bid amount, and contractual terms.
Parties Involved
A surety bond involves three primary players: the financial guarantor or surety of a construction bond, guaranteeing the obligee that the contractor (called the principal) will act in accordance with the terms established by the bond.
The obligee is the owner of the project who hires the contractor and requests the bond. This person or other entity sets the terms and conditions of the bond and will file a claim if the contractor fails to perform or violates the contract.
The principal is the contractor purchasing the bond. If the contractor fails to perform, they will be liable based on the terms and conditions set forth in the contract and bond.
Surety companies will evaluate the financial merits of the principal builder and charge a premium according to their calculated likelihood that an adverse event will occur.
Both the surety and contractor are held liable if the contractor fails to abide by any of the contract’s conditions.
Bid Bonds vs. Performance Bonds
A bid bond is replaced by a performance bond when a bid is accepted and the contractor proceeds to work on the project.
A performance bond protects a client from a contractor’s failure to perform according to the contractual terms. If the work done by a contractor is poor or defective, a project owner can make a claim against the performance bond. The bond provides compensation for the cost of redoing or correcting the job.
Failure to Meet Obligations
If the contractor does not meet the obligations of the bid bond, the contractor and the surety are held jointly and severally liable for the bond. A client will usually opt for the lowest bidder since it will mean reduced costs for the company.
If a contractor wins the bid but decides not to execute the contract for one reason or another, the client will be forced to award the second-lowest bidder the contract and pay more. In this instance, the project owner can make a claim against the full or partial amount of the bid bond. A bid bond is thus an indemnity bond that protects a client if a winning bidder fails to execute the contract or provide the required performance bonds.
How to get the best Bid Bond?
Frankly speaking, getting the best bid bond guarantee that suits the demands of the project owner and at an efficient cost is not easy. It requires an understanding of requests, relationships, good communication with the insurance issuer or bank.
One of the challenges of issuing surety bonds is the speed, the accuracy of documents by numbers and legally. If it fails to provide Surety in accordance with the owner’s request, it may lead to failure in the tender.
For this reason, it requires the help of surety experts who have extensive relationships among insurance and banks.
The right expert is an Insurance Broker who has extensive experience in the field of financial risk. An insurance broker that will help you arrange the issuance of guarantees with some insurance company or bank accurately and faster.
The insurance broker is an insurance expert on your side as the insured while the insurance agent is on the side of the insurance company, he/she represents.
One of the insurance broker companies in Indonesia that has extensive experience and successfully issued thousands of surety bonds is L&G Insurance Broker.
For Bid Bond needs and your entire project insurance needs, contact L&G right now!
Source:
- https://cleartax.in/g/terms/bid-bond
- https://www.thebalancesmb.com/what-is-a-bid-bond-844376
- https://www.investopedia.com/terms/b/bid-bond.asp
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E-mail: customer.support@lngrisk.co.id
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