Contractors put so much effort into the bidding process. And yet, there is one thing that can cause the bid to be thrown out, BUSTED! All that effort is wasted.
For contractors pursuing public works projects (city, state, and federal), bidding is how they acquire most new jobs. A lot goes into creating the project proposal. The estimating, subcontractor pricing, materials, insurance, it all takes time. When their bid is busted, they lose the time and expense dollars plus the revenues are unrealized. That’s a huge drain management must avoid.
The Process
Almost without exception, public works projects require bid security to accompany the proposal – usually issued in the form of a Bid Bond. The contractor uses a Bond Request Form to notify the surety of the upcoming bid event. They state an estimated contract price (ecp) on the bond request form, which is the focus of the underwriting decision. It is the approximate expected amount for the Performance Bond that follows when the contract is awarded.
The ecp is a guesstimate. Sometimes the subs come in higher than expected. Material costs could jump, especially when unique items have been stipulated: expensive electrical equipment, etc. The final bid number may be higher than anyone anticipated. Then what?
The Issues
It is possible that the bid documents will not support the new, higher amount – resulting in a lost opportunity.
This can happen if the bid bond indicates a maximum dollar amount. Federal projects require a bond for “20% of the attached bid,” meaning it automatically adjusts to the contract amount being submitted. But in some cases, a “capped bid bond” is issued. It will not follow the contract amount above the ecp that was approved. Example, a 10% bid bond is issued on a project estimated / approved for $500,000. If the bid bond is capped, it cannot be worth more than $50,000. When submitted, if the related proposal exceeds $500,000, the bid security is deficient: Proposal is thrown out! (How do you know if the bid bond is capped? See below *)
In some cases (common in New Jersey) a Consent of Surety is also required. The surety must state “we promise to issue the P&P bond.” This too may be capped, “This Surety Consent shall be valid in support of a contract amount not exceeding $500,000.” Here again, the bid is busted at the last minute – too late to have the documents re-issued for the higher amount.
Prevent / Solve The Problem
Prevention
- Don’t shortchange the estimated contract amount. Try not to cut it close. There is never a problem if the contractor bids less than expected.
- Don’t order the bond too early. Try to gather the pricing first or at least get indications from subs and suppliers. Using the engineer’s published estimate (in the bid advertisement) may not be a sufficient basis for the bond request.
- Determine if the bond, surety consent or power of attorney has a maximum dollar value that may limit the bid amount. Knowing about it is half the battle. Consider increasing the ecp to create a cushion.
When Faced With A Last Minute Increase Unsupported By The Bond Or Consent
- Notify the surety promptly! If they re-approve the bid for the higher amount, new documents can be produced. Originals could be rush delivered or electronic copies used – if accepted by the obligee.
- If the obligee allows, the dollar value of the bid bond can be supplemented with a bank check. Note: If the Surety Consent is deficient, it must be re-issued / increased.
Honor Cap
Here is an important variation: What action is appropriate when there is NO CAP on the bid bond or surety consent? In this case, there is nothing to prevent the contractor from proceeding with the “higher than authorized” bid amount.
We’ll coin a phrase here, the Honor Cap comes into play. The Honor Cap is the ecp that was approved by the surety. Is the contractor willing to respect the bond approval process? If they cannot obtain re-approval in time, will they still submit the bid and worry about it later? The bonding company expects the contractor to honor the approval terms. This is essential if an ongoing relationship is desired. In this case a simple phone call may be all that’s needed. The surety can quickly confirm that the higher estimated contract price is approved.
FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision, Bid and Performance Bonds since 1979 – we’re good at it! Call us with your next one.
Steve Golia, Marketing Mgr.: 856-304-7348
First Indemnity of America Ins. Co.
* Capped Bid Bond, sample language: “Ten Percent of the attached bid not to exceed $50,000.”