Nixon & Lindstrom Insurance

Why a Bid bond is Needed and the Parties Involved
WHY SOMEONE MAKES A "BID" TO SUPPLY CERTAIN SERVICES OR MATERIAL TO A PRIVATE OR PUBLIC GROUP SO	PARTIES PRINCIPALS
WE AGREE TO BOND HIM	SURETY
GUARANTEEING HE WILL FOLLOW THROUGH AND SIGN A CONTRACT AND PERFORM THE WORK HE MIGHT BE "AWARDED" BY	OBLIGATION
THE PRIVATE OR GOVERNMENTAL UNIT WHO ASKED FOR BIDS	OBLIGEE

WHY A CONTRACT BOND IS NEEDED AND THE PARTIES INVOLVED
WHY SOMEONE IS "AWARDED" A JOB SO	PARTIES PRINCIPAL
WE AGREE TO BOND HIM	SURETY
GUARANTEEING HE WILL PERFORM AND COMPLETE THE JOB HE HAS AGREED TO PERFORM FOR	OBLIGATION
A PRIVATE OR GOVERNMENTAL ENTITY AND	OBLIGEE
SOMETIMES 3RD PARTIES (THE PUBLIC) ARE ALSO PROTECTED FOR LABOR AND MATERIAL, ETC., THAT THE CONTRACTOR OBTAINED.	3RD PARTIES

The need for all bonds has been said to be because someone (a principal) must guarantee that he will meet his "contractual obligations". In the case of License and Permit, Judicial and Public Official bonds, this "obligation" is actually a legal one imposed by law.

Contract bonds cover some things a principal voluntarily assumes. It is not imposed by law on the principal. It is this voluntary act of agreeing to do something (such as to build a building) that usually creates the contractual obligation and the need for a contract bond.

The person for whom a building is being built (the Obligee) wants to be absolutely sure that it is done correctly and completely and that all bills are paid -- or else. This "or else" is his right to recover from the surety under the contract bond he demanded of the contractor.

Perhaps we should state that even though the assumption of the contractual obligation is voluntary on the part of the principal, it is sometimes mandatory on the part of the obligee, some governmental units are required by law to have a principal supply a contract bond; an individual or private firm can do as they choose about requiring or not requiring such a bond from a principal.

The name "Contract bonds" is somewhat misleading. It means any principal who assumes a contractual obligation in a contract. Obviously, this would apply to many individuals and firms who are not really "contractors", in the sense that they are not building buildings or bridges, etc.

The term "Contract bonds" is used to cover a number of individual types that can be more clearly defined.
For instance:

1) A PERFORMANCE BOND is to guarantee that the principal will "perform" what he agreed to do in a contract. Usually, it protects only the obligee. (Note: See later remarks about Completion Bonds)

2) A PAYMENT BOND is to guarantee that the suppliers and laborers under the preceding bond (Performance) are all paid by the principal for their material or labor. Thus, it protects 3rd parties.

NOTE: Ordinarily, governmental units and most private individuals and firms, require that their Contract bonds include both Performance (No 1 above) and Payment (No 2 above). They are combined into one bond.

3) A MAINTENANCE BOND is to guarantee the workmanship of a Performance bond beyond the usual year or two required in most contracts

NOTE: The manual rates for contract bonds are for two years. This maintenance provision is part of any Contract bond for as long as the Contract bond runs.

4) A SUPPLY BOND is to guarantee that the principal will "supply" what he has contracted to supply. Usually, these do not involve labor but simply to furnish some service, or goods such as food to a county hospital, or coal to a city light plant.

5) A BID BOND usually precedes 1,2 and 4 above. The governmental unit or private individual or firm will advertise and invite bidders. Each bidder must submit his sealed bid with a bid bond that reads "5% (or 10%) of the attached bid". The Bid bond is to guarantee that the successful bidder will assume in writing the contractual obligation on which he bid. A Bid bond should not be issued unless the surety is willing to follow through and supply the Contract bond, in the event their principal was the successful bidder. The surety, when considering or issuing the bid bond, always must assume their applicant will be the low bidder.

6) A COMPLETION BOND is often confused with Performance and/or Payment bonds (1 and 2 above), they are not the same. A completion bond would ordinarily precede and be needed in addition to a Performance and Payment bond. For instance, a bank may agree to finance you in developing a housing project. They demand a Completion bond to assure themselves you will so use their funds, and thus establish something of value to back up their mortgage. After getting your loan, you would likely require a Bid bond and a Performance and Payment bond form the contractor who would do your building work. Completion bonds are regarded as hazardous and are seldom written.

1) 2 years of CPA prepared financial statement for the business. These statements should be of "review" quality or better.

4) Completed "work on hand" form which indicates the volume of work the contractor currently has in progress