Secrets of Bonding #116: How NOT To Handle Bid Bonds

Just like everything else, there is a right way and a wrong way when it comes to bid bonds.  You may be happy to learn from your mistakes, but these lessons can be costly.  Messing up a bid bond can result in the loss of a lucrative contract.  It can cause the demise of your bonding relationship, could become the basis of a lawsuit, or merely make you look bad in front of your boss.  In any event, it’s better to learn the easy way, so…  

There are three things to remember when it comes to bid bonds:

  1. Underwriters view the bid bond as the first link in a chain of events that hopefully will result in the issuance of a performance bond. Therefore, the decision to provide it is predicated on the surety’s ability to support the eventual Performance & Payment bond that may result.  The decision is based on the potential dollar value of the contract, not the bid bond.  A 10% bid bond on a $1 million proposal is not a $100,000 decision.
  2. There is such a thing as a bid bond claim. We don’t “jno-you-diint2ust issue” them.


What Not To Do #1

Just to be sure you have the bid bond in time, you could move up the date on the Bond Request Form. The bid is really on the 25th, but you indicate the 22nd, just so they don’t mess you up.  Pretty clever?

Actually, no.  The underwriter will probably ask for a copy of the bid invitation and see the actual date.  Plus, they may have other bidders on the same job, and the info may be available online, etc.  Such tactics can hurt your rapport with the surety.  You want to be cute, but not in this way.

What Not To Do #2

It is common for sureties to indicate a maximum dollar amount (bonding line) that they will support on a single contract. Let’s say it is $1 million per job. 

If the bid calculation for an upcoming project is firm at $1.25 million, what do you do?  

Another scenario: You expected to not exceed $1 million but a sub or supplier price comes in higher than anticipated at the very last minute!

  • Lower the bid to $1 million to fit the line and hope to make up the difference on the project?
  • Request the bond for $1 million but put in the bid for $1.25 million, then claim it was a communication error?
  • Use the $1 million bid bond, then plan to get a different surety that will provide a $1.25 P&P bond?
  • Don’t bid the job?

no babyThere is really no way to “sneak in” a bid for a higher amount.  The system is set up to prevent this.  In addition, the surety may issue a capped bid bond, which means it is void if used for more than the approved project amount.

The best option is to make a special presentation to the underwriter and gain support for $1.25 million.  All the other options can have bad consequences.

What Not To Do #3

A new project opportunity pops up and there isn’t enough time to get a bid bond. Is it best to:

  • Submit the bid with no security and hope to provide it later?
  • Use a check instead of a bid bond, and plan to exchange the bond for the check after the bid opening?
  • Don’t bid the job?

A possible solution could be an electronic copy of the bid bond (which can be printed out and signed / sealed by the contractor).  Most obligees will accept this, at least temporarily.

We don’t recommend bidding with a check unless the surety has indicated their support of the project.  Without that commitment in hand, the failure to provide a P&P bond could cause loss of the bid security and contract.  Bad outcome!

What Not To Do #4no-you-dont1

The proposals have been turned in and the bid results are known. You are low bidder, REAL low.

Bids that are more than 10% below the second bidder raise a red flag for the surety and could prevent their support of the P&P bond.  What to do?

  • Report the bid results but “fix up” the numbers to eliminate the spread in excess of 10%.
  • Report the results and hope for approval.
  • Withdraw your bid.

This actually happens pretty often. We think the best approach is to step back and review the bid calculation, the bid results and the relative competitiveness of the proposers.

If there is an error in the calculation, it may be prudent to quickly withdraw the bid and avoid an unprofitable contract.  The bid results may show a cluster of bidders.  In these cases, the low bid may be acceptable if it is not more than 15% below the average of the second and third. (The point is to avoid an under priced project, bad for the contractor and any surety that may have to complete the job.)

It is also possible that the low bidder has a unique advantage such as closer to the project, specialized equipment, prior experience, materials on hand, or a special relationship with the architect or owner. The key is to make a written presentation to the underwriter explaining these details.  We hope these tips help.  


Oh, here’s the third thing to remember:

3. Treat bid bonds as the first step in a process, and above all, protect your surety relationship.  It is more important than any one bond or project.

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.

Surety Survey 2016: What I HATE the most is…

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It’s THAT time of year again: Financial Statement Decisions

Here is article #47 re-published, timely comments for contractors with a 12/31 fiscal year-end.

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When it comes to Bid and Performance Bonds everyone knows that financial statement numbers are important.  But before surety underwriters get to them, they evaluate the method of financial presentation, its quality and credibility.

  • Is a CPA needed or can a PA or Tax Preparer be used?
  • Audits are expensive.  Can contractors avoid the cost?
  • Are there times when you can’t you use the same accounting method for tax and financial reporting?

There are a number of variables to consider.  Let’s go over what to use and when.

Accounting Professionals

A CPA is a Certified Public Accountant. These people are the premiere accounting professionals.  Bonding companies expect contractors to have a CPA prepared fiscal year-end (FYE) financial statement if individual bonds will be in the range of $1 million or more.

Below a CPA is a PA, Public Accountant, and then there are bookkeepers and tax preparers. Accounting professionals with lower credentials should only be used by contractors with small bond needs.

Accounting Methods

There are four accounting methods.  Any can be used for tax purposes, but banks and bonding companies are more selective.

  1. Accrual Method – probably the most common for construction companies.  May be acceptable for all bonding situations.
  2. Percentage of Completion – more sophisticated than Accrual.  Often used by larger contractors.
  3. Completed Contract – used by contractors that have multi-year projects such as road and bridge builders.
  4. Cash Method – acceptable for tax purposes, but not for financial reporting to banks or sureties.

Financial Presentation

The presentation can vary greatly. This too, is an important element. Surety underwriters expect to make a number of financial evaluations.  If the presentation is inadequate, they will not have info they need (schedules, notes and other elements).you-decide

Audit – the accountant’s cover letter states an “unqualified opinion” meaning they vouch for the accuracy of the report without reservation.  This is the most expensive presentation and is required when bonds and bank credit are in high amounts ($2 – 5 million and above).

Review – This report includes some “review” and verification by the preparer, but less than an Audit. Review reports are required by bonding companies starting with projects around $1 million.

Compilation – This is merely a typing job by the accounting firm, using the numbers provided by the client.  They make no verifications with outsiders and may not even double check the arithmetic. Normally this is acceptable for clients needing bonds below $1 million.

QuickBooks – Financial Statements produced from the client’s computer may be adequate for small bonding lines, or to provide a mid-year update.  “Internal” financial statements are not used as primary underwriting info for sizable obligations.

Learn a little more about accounting methods:

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