I am often asked about how electronic bid bonds are used in public works projects. So, I thought it might be useful to cover this topic in a short blog entry.
Purpose of Bid Bonds
As part of a bid submittal, a bid bond is issued by the contractor to the project owner to guarantee that they will undertake the contract under the terms of their bid if they are awarded the contract. The bond is subject to full or partial forfeiture if the winning contractor fails to either execute the contract or provide the required performance and/or payment bonds. The bid bond assures the owner that should the bidder be successful, the bidder will execute the contract and provide the required performance bonds. A Bid Bond guarantees that the owner will be paid the difference between the defaulting contractor’s bid price and the next closest bid price. This action is only triggered should the apparent low bidder be awarded the contract but fails to enter into the contract.
Bid bonds are typically in an amount equal to 10 percent of the bid price. Bid bonds can be issued by a surety or, if accepted, they can be issued in the form of a certified check. The bid bond document is signed by the contractor, and is signed and sealed by the bonding company and its agent. In a typical sealed bid process, the original bid bond document is included with the bid. While rare, there have been cases of where fraudulent bid bonds have been discovered after the owner has tried to collect on the default of a contractor who was found to have submitted a forged or otherwise invalid bid bond document.
How Electronic Bid Bonds Work
To facilitate the process of electronic bidding, particularly for construction projects, electronic bid bond technologies have emerged. They generally work as follows:
- The electronic bid bond provider establishes a secure online system for tracking the issuance of bid bonds.
- The electronic bid bond service registers and certifies the authority of the sureties and agents that write the bonds.
- A contractor needing a bond goes to a registered agent and executes a bid bond.
- Instead of receiving a bond document in paper form, the contractor receives a unique bond validation identifying number.
- When submitting an online bid, the contractor enters their bond validation number at the electronic bidding website.
- After the bid closing date and time, the owner can view the online bid submittal and validate the bond. They validate the bond by clicking on the bond validation number which securely links to the electronic bid bond provider website and presents an online view of the certified bid bond.
We have integrated our eBid eXchange platform with the InsureVision, the leader in providing electronic bid bond management services throughout the United States.
Receiving Bid Bonds Online – Alternative Approaches
When considering whether an electronic bid bond management system makes sense for your electronic bidding initiative, consider the following:
- Facilitates a completely electronic process
- Assures the validity of submitted bid bonds
- Requires that bonding agents and contractors pre-register with the electronic bid bond service and pay appropriate fees
- Does not easily accommodate the submittal of checks as security
If you are considering a move to electronic bidding, particularly for your construction projects, you can accomplish the receipt of bid bonds electronically in one of two ways:
- Allow contractors to upload (attached) a scanned version of their bid bond (which means you are responsible for determining validity)
- Use the electronic bid bond service to allow submittal and third party validation of the bid bonds
Allowing the submittal of both checks and electronic bid bonds in a hybrid process presents a little additional process complexity, but we have solved this problem by providing a way to explicitly log the receipt of checks as well as electronic bonds.
As always, please contact me with any questions or comments.