Considerations When Setting Terms on Contract Bonds

Published on April 21 2014

Contract bonds are every useful to project owners in ensuring the best possible field of candidates for a job and protecting against financial loss should they fail to deliver. These key benefits may be great for the project owner, but instituting a need for bid, performance or other contract bonds can be a problem for others. These bonds are typically issued by established financial institutions like banks and insurance companies they are rather rigorous in the evaluation of the business applying for the bond and will often lock out relatively new, small and less experienced business.

This makes it difficult for such business to compete effectively against large more established companies. This requires that project owners be discerning of the particular projects they require bonds be submitted for. Some projects carry relatively lower risks and should be exempt from this requirement to give smaller businesses a chance to compete and benefit. Another issue with bonds is that they can increase the cost of undertaking a project for the contractor. Performance bonds in particular typically cost a lot of money to secure. This means additional financial commitment for the contractor who could have used the money to pay subcontractors or suppliers. Limiting the liquidity position of the contractor is never a good idea, especially when they are trying to work to your benefit.

Another challenge with these bonds is that they are no assurance of winning a bid. Financial institutions that issue them charge money for their preparation and evaluation. All bidding contractors will submit them, but only a limited few will actually win the bid, making this an unnecessary expense for many. There are also some problems where the project owner does not clarify to candidates that following the bid, they must provide a performance bond. Given the expense involved, it is important for project owners who may or may not require a bid bond, also indicate that whoever wins the job will also need to submit a performance bond. 

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