Bid bond is a type of contractual bonds that provide compensation to the holder in the event that a bidder for a contract is unable to start the project. This type of bond is often used for civil works and other projects with similar contractor selection processes based on a tender, and serves as a guarantee that the contractor has the funds to carry it out for the price specified in the application.
Characteristics of bid bonds:
1) bonds are secured by collateral (in this case, the percentage of collateral increases in the case of federal projects), which makes it possible to weed out frivolous candidates at the stage of choosing a contractor;
2) if the winning contractor refuses to perform the work, and in connection with this, the project owner has to pay more to the bidder with the second lowest bid price, then the latter has the right to demand full or partial redemption of the bond;
3) the cost of a bond is covered by an annual administrative fee and does not depend on the number of issued bonds;
4) the agreement involves three parties: the principal (contractor), the creditor (project owner) and the guarantor (insurance company/bank). The latter issues bid bonds and collects a fixed or premium amount from the contractor, who in turn provides securities to the contract holder;
5) after the successful completion of the project in accordance with the contract, the bond is redeemed.
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