A common question among contractors is: “What is the difference between a bid bond and a performance bond?” And to be honest, there are many differences between the two bond types. Think of a tomato and an orange. Sure, they’re both technically fruits. But only one of them belongs in a fruit salad.
In this post, we will go over the 5 key aspects of Bid & Performance Bonds. These include: What are they? Who is covered? When are they needed? What are the Bond Amounts? How much do they cost?
For a quick reference, see the below chart comparing the two bond types.
|Bid Bond||Performance Bond|
|What are they?||A Bid Bond guarantees that you, the contractor, will sign & complete the contract you are bidding on.||A Performance Bond guarantees that you, the contractor, will perform the work outlined in the contract you have signed.|
|Who is covered?||The Bid Bond protects whoever requested bids for the project. This will usually be the project owner. In our words, “the obligee”.||The Performance Bond protects the project owner from incompletion of the project.|
|When are they needed?||Bid Bonds may be required to accompany a bid proposal. Usually, if a Bid Bond is required, it will be stated in the Invitation to Bid.||A Performance Bond may be required after a contract has been signed and before the work can begin. Usually, if a Performance Bond is required, it will be stated in the contract.|
|What are the bond amounts?||The Bond Amount of a Bid Bond will be a percentage of your Bid Estimate. Generally ranging from 5-20%.||The Performance Bond amount is almost always going to be 100% of the contract amount. On some occasions, the contract may state a specific Bond Amount.|
|How much do they cost?||Here at South Coast Surety, Bid Bond costs are kept to a minimum. We have a one-time annual fee of $350 to cover you for an entire year’s worth of Bid Bond Service.||Performance Bonds are always paid as a one-time premium. When you get approved, your account will be given a rate percentage—anywhere between 2.5% and 3.75%. To calculate your premium, simply multiply your account rate percentage by the total contract amount.|
Let’s Get Into More Detailed Descriptions of Both Bond Types
Bid Bonds are usually required when you are submitting a bid proposal for a project. The Invitation to Bid may state that a “Bid Security” is required—in the form of a Bid Bond or Cashier’s Check—for a certain percentage of your Bid Estimate.
Rather than going to the bank, getting a cashier’s check, and having the project owner hold on to that check. Simply submit a Bid Bond instead. This Bid Bond is necessary for two reasons:
- It acts as a guarantee that you will sign & complete the contract you are bidding on
- It shows you have been approved with a surety and can provide a performance bond if you are awarded the job.
If you fail to sign the contract once you have been awarded it, then the project owner will have to award the contract to a higher bidder or they may have to put the project out to bid again.
As a penalty for the additional costs caused by your failure to execute the contract, the entire bid security is forfeited. If you provided a cashiers check then the project owner will deposit your check. If you provided a bid bond, a claim will be made against the bond and the surety will most likely pay the contract owner the full amount of the bid bond. These Bid Bonds usually only have a Bond Amount of 5-20% of your total Bid Estimate.
Unlike Performance Bonds, the cost of a Bid Bond is usually a small fee. While the fee may vary from agency to agency, the industry standard practice is to charge an annual fee of $350 that covers ALL bid bonds needed within a 12 month period. Essentially, you could call in once a week for a year asking for a Bid Bond and it would only cost you the one-time payment of $350. It’s like how I pay for my gym membership, except hopefully your $350 investment will actually be put to good use.
Just like Bid Bonds, Performance Bonds are required by the contract owner. Unlike Bid Bonds though, Performance Bonds guarantee the contract, not the bid. So, you don’t need a Performance Bond until you have been awarded the contract.
Performance Bonds are in place to ensure you perform the work outlined in the contract. Usually, Performance Bonds are issued in tandem with Payment Bonds. Payment bonds guarantee you will pay all your people (subcontractors, laborers, etc.) and your material suppliers, which ensures there will be no liens on the project.
The Performance Bond Amount is 100% of the contract amount, however, there are occasions where the contract will require a different bond amount. Either way, the premium is always based on the contract amount and not the bond amount.
Performance Bonds do cost more than Bid Bonds in that there is a premium due for every Performance Bond, rather than a one-time fee. The cost of your Performance Bond also includes the Payment Bond, if required. So, you will only need to pay one premium even if both bonds are required.
It is important that you include the cost of your Performance Bond in your Bid Estimate so that your bid reflects your total costs. The cost of your Performance Bond is your Performance Bond premium. The simplest way to calculate your premium is to multiply your account rate percentage by the total contract amount. Let’s say, for example, you have an account rate of 3% and a contract amount of $100,000, your premium would then be $3,000.
Don’t know your account rate? Ask your account manager at South Coast Surety what your account rate is or you can click here to apply now.
In short, Bid Bonds cover your bid, Performance Bonds cover your contract. Either way, both bond types protect the project owner. Bid Bonds are required when submitting a Bid Estimate. While Performance Bonds are needed when you have been awarded the contract. The Bid Bond Amount is a small percentage of your Bid Estimate and the Performance Bond Amount is equal to the contract amount. Bid Bonds do not have a premium and usually cost a small fee, typically a one time fee of $350. Performance Bonds have a premium, based on the contract amount, and are charged per bond.
If you have any further questions regarding your bonding needs, please give us a call at 1-800-361-1720.