Do You Use Project Bonds?

As an integrator, project bonding was common.

For background, there were two major types of bonds required by the projects we bid:

1) Bid Bond: This is 'quote insurance' so if you win low bid but then decide you don't want the job, the customer (bid solicitor) files a claim against your bond and then picks the next lowest bidder. This Bond guarantees they still get pay the 'low number' no matter who actually does the job, because the bond pays the difference.

2) Performance Bond: An even stronger type, this essentially is insurance that the bidder will successfully finish their work. If they start on a $5M job, but only completes $2M of it (ie: abandon the project, go out of business, welch on a deal, etc), this Bond pays the difference to the customer so they can finish the job or correct bad work.

If you handle bid responses, can you give feedback on how they typically are used?

Which bond type do you deal with, and how much money are they typically written for? Have you ever seen a bond used?

I have included requirements for both types of bonds in my RFPs and specifications over the years, mostly for government jobs, but also occasionally for some larger private jobs.

Collusion amongst contractors has historically been a problem in certain construction trades, with bids being manipulated so that certain contractors win certain jobs at a desired price point. Various contractors submit bids, and after bid opening, bids are withdrawn until the "appointed" contractor is the low bidder and wins the job. Bid bonds are one tool used to discourage this type of activity. These bonds also tend to prevent contractors from submitting frivolous bids just to "test the waters" without being seriously interested in winning the project.

Performance bonds, as you indicate, are designed to assure that a project gets completed as agreed upon. They typically cost between 1% and 3% of the total contract price. The companies who issue performance bonds are usually quite strict about who they issue bonds to, requiring the contractor to be financially stable as well as to have previous experience with jobs of a similar type and size. Because of this, requiring a performance bond tends to prequalify bidders, increasing the chances that only qualified companies will submit bids.

A joke in the industry states that if a contractor can obtain a bond, you probably won't need one, and if he can't, you probably will. In my experience, this is not too far from the truth.

Many smaller contractors and those just starting out have trouble qualifying for performance bonds, requiring that they partner with larger companies in order to bid on jobs. Some very large jobs (airports, seaports, etc.) have such rigorous bonding requirements that they are off-limits to all but the very largest of contractors. This is the how some of the big national and multinational security integrators seem to survive, despite their track record of mediocre performance.

Having a performance bond can be a hassle for the consultant/architect/engineer because the bonding company requires monthly written updates on how the job is progressing and on how payments are being made relative to the progress of the job. If a job is going poorly, the bonding company wants to know about it as early as possible.

A joke in the industry states that if a contractor can obtain a bond, you probably won't need one, and if he can't, you probably will. In my experience, this is not too far from the truth.

That's actually fairly profound.

Why don't more customers require project bonding for smaller jobs? I understand that there is an overhead cost and you limit your potential pool of responders, but heck - those might be the ones you want to weed out anyway!

I understand the cost of bonding mainly from the integrator side, and it can tie up quite a bit of free cash for collateralized bonds.

This is the how some of the big national and multinational security integrators seem to survive, despite their track record of mediocre performance.

Also profound, and clearly an 'FU' strategy if you've competed against it in the real-world.

This is a insightful post and great feedback. Thanks!

I worked on fairly large national project rollouts (largest being $12 million) and strongly advocated we have our subcontractors provide performance bonds... but the 1-3% margin erosion was not worth the assurances built into the performance bond for executive management. I suppose it's a matter of how risk adverse you are just like any insurance.

Bonds are required on most sizable public bids (e.g. K-12 schools, municipal work, etc) and this protects them quite well. I have seen a contractor fold and the bond used to procure another contractor to complete the work. Another experience where it protected the customer is when the company i worked for shut down a division performing local work and sent out an announcement to their clients that they could no longer honor warranties (who does this?). The customers contacted the bonding companies who in turn contacted us and told us this threatens our larger main divisions bonding. Needless to say we honored their warranties.

Bonding is a problem for mid-size integrators, at least in my experience. They're large enough to handle the project(s), but are limited in their bond amounts, so it prevents them from bidding a lot of them. Don't get me wrong, there are definitely some companies you don't want to get a bond for these projects, but there are others who would do an exceptional job but can't bond it.

In my past, we constantly begged to get our bond limit raised, had to pick and choose projects based on where we were at in our limit, and not once did we ever fail to complete a project. We eventually found a second bonding company who would take us on so we had some leeway after the first was full up.

It's very true that national integrators end up getting a lot of projects simply because they can bond them. We ran into it a couple of times. We once got clever and found a friendly electrical contractor with a much higher bonding limit to be the prime, and "sub-contract" us, but not every project will accept that.

I pulled a bid exactly once in my career and gave up the bid bond, and it was embarrasing enough for me I never did it again.

Wow, I have never seen anyone actually hold feet to the fire on a bid bond. If someone has goofed up on a bid everyone knows it at the bid opening and I think most customers realize the shame is enough. In thirteen years of bidding on bonded projects I have never seen someone actually exercise the bond against an integrator.

Performance bonds are a different matter...

I have seen a bid bond get used once. I was way, way high on the bid, so it didn't impact me at all (I still lost), but I just remember the bid getting pulled over a $2,000 gap on a $50,000 job. Crazy.

I have seen the Performance Bond used once, but not for the security bid. It was a new school project, well into the tens of millions in total, and the structural steel company (red iron) defaulted and went to bond.

Talk about a nightmare. It put the entire project back. If the security guy defaults, the building doesn't have cameras for a few weeks. But when the steel guy defaults, there is no building!

Usually in Ca. comes with licensing, Min. Bond.

Any Project over 50k has to bond.

Mike put it well, It Proves Company Solvancy and Ability to secure funding if the project goes south on you and you still have to complete with in the scope.

Usually the expectation is Completion No Matter where the project is in Legal.

I have had Project go south and had to perform project anyway. After courts sort out whos at fault then the settlements get paid.

Performance, Payment, Completion ( Insures Completion )

Strong Financials are usually required to accompany the Bonds

Because the laws in contracting dont allow for Stoppage of project.

Example : Kings Arena had to security a 1/2 billion dollar bond before they would start the project so as to garrantee payments, performance , completion with in specified time frame.