Secret 84: Manage the Bid Bond Account
For many contractors, the main thing they want to know about Bid Bonds is that they have them when they need them. However, the successful management of the account requires controlling a number of elements. Let’s review them.
The bid bond facility consists of a single and aggregate limit. The “Single” is the maximum size project that can be bonded (without a special exception), and the “Aggregate” is the maximum combined exposure on the account at any given time.
It is important to observe that the single limit refers to the project amount not the penal sum (dollar value) of the bond. If a contractor is bidding a $500,000 federal project with the 20% bond requirement, the amount of capacity involved is $500,000, not the bid bond amount which would be $100,000 (.2 x 500,000 = 100,000). The underwriting decision is always based on the contract amount.
Bear in mind, the bonding company does not want to know the actual bid amount prior to the opening. When requesting the bid bond, the underwriter is given the approximate bid / contract amount in order to preserve the bid confidentiality.
Let’s stay with the $500,000 example. If the contractor’s calculation is truly $485,000, it would be appropriate to round up and make the bond request for $500,000. If the actual calculation is $510,000, again, it should be rounded up to allow for last-minute increases. A bid bond request for $525,000 or more would be advisable.
While it is true that the penal sum of the bid bond, if expressed as a “percentage of the attached bid,” will automatically adjust up or down to the actual bid amount, a problem arises if the bonding company issues a “capped” bond. This method it cannot adjust upward beyond the amount stated on the approved bond request. If a capped bond is used, the contractor will invalidate the bond, and their proposal, if the bid exceeds the amount approved by the surety.
1. The first rule in managing the bid bond account is to request the bond for an amount sufficiently high to adjust to last-minute increases. This avoids the temptation to bid above the approved amount – a practice that is damaging to the surety relationship.
2. The second important guideline concerns the aggregate capacity. The aggregate calculation is made on a daily basis and includes the incomplete portion of open projects, signed but not started jobs, awarded projects, low bids, plus undecided bids. As a consequence, a portion of the obtainable aggregate will be unnecessarily consumed if bid estimates are rounded up unnecessarily high. In our example, if the contractor calculated a $510,000 bid and requested approval for $600,000, they may needlessly consume capacity that could have remained obtainable to sustain another bid.
3. Another point, submit the bond request early enough to allow time for discussion and processing. Usually a associate of days is needed for processing.
In conclusion, when requesting bid bonds, round up the estimated contract amount to allow for last-minute increases, but remember to preserve aggregate capacity for future bids.
Allow sufficient time for processing and keep in mind, to the decision makers, it is not “just a bid bond.”