Secrets of Bonding 76: The Second Bidders Second Chance

Author : Okuneva80
Publish Date : 2021-06-02


 Secrets of Bonding 76: The Second Bidders Second Chance

In this article we will talk about some opportunities that may exist for second bidders. These are the contractors who have come in 2nd on a competitively bid project, such as a federal or state contract. These projects are typically awarded to the "lowest responsible bidder" (meaning they must have the proper credentials and meet other requirements.) As for the 2nd bidder, they get nothing. They were close, but did not win. It's a 100% waste of time and money - unless they DO ultimately acquire the project. A project may be awarded to the second bidder under certain circumstances - such as a defect in the low bidder's paperwork.

There are many documents required in a typical bid proposal: Licenses, certifications, references, non-collusion affidavits, business registration, consent of surety, bid guarantees, etc. If documents are missing, or issued with defects, the low bid can be declared "non-responsive" at the discretion of the project owner. The 2nd bidder then becomes the lowest responsible bidder and may receive the contract award.

Here are some of the technical areas to check that can cause bids to be rejected:

1. Mandatory forms Failure to use mandatory f

These were among the caveman's greatest inventions. But unfortunately, surety rates have remained virtually unchanged since the Paleolithic Era!

That may be a slight exaggeration, but it is true that bond rates and rating methods do not change much. Here are some of the peculiarities worth knowing, primarily in the area of contract surety:

 

  1. All sureties are entitled to charge for bid bonds, but most do not.
  2. They may charge for performance bonds in advance, but many wait 45 days for payment even though the instrument is uncancellable.
  3. A performance and payment bond costs the same as just a performance.
  4. A 100% performance and 100% payment bond costs the same as a 100% performance and 50% payment.
  5. A maintenance bond may be cheaper if the same surety preceded it with a performance bond
  6. 20% performance may cost the same as a 100% bond even though the surety has 1/5th as much exposure.
  7. In cases where a bid bond or surety consent letter is required, but then the work is awarded without requiring a final bond, the surety is entitled to make a charge for the unissued performance bond.

Now here is my favorite crazy bond rule.

 

Situation: You have a $1,000,000 private contract on which a P&P bond is optional. The project owner asks the contractor to price an alternate to include a bond.

Let's say the bond rate is 2% of the contract amount. So what is the bond price alternate?

a. $20,000

b. $40,000

c. $20,400

d. $40,200

I know you love "a." It just looks so right.

But alas, that is not the answer, which is why this wins the wacky award!

"c." is the correct answer. The reason is that the bond fee is actually calculated on itself. When determining the bond fee, it is not correct to remove the bond cost from the contract amount. Like the cost of insurance and all costs related to the project, the bond cost is included in the contract amount.

Therefore, the correct basis for the calculation is $1,020,000 x 2% = $20,400.

Q. So what about the additional $400? Should the calculation actually be $1,020,400 x 2%? (Then, wouldn't you have to recalculate it again, and again, and again... )

Q. And who pays the extra $400? It's not in the $1,020,000 contract amount.

A. Beats me. You better ask that Neanderthal in the corner office!

orms, use of obsolete / expired forms, or not following a stipulated format. Does the bid invitation contain a bid bond form described as mandatory? Bid bonds are all similar but the failure to use the right format or document is a potential cause for rejection.

2. Bid bond details Check all the typed information for accuracy.

a. Bidders name

Maintenance Bonds can be troublesome, even though you could say the risk on them is relatively low. So what's the deal on these?

These normally follows a Performance and Payment (P&P) Bond that guarantees a construction contract. In many cases the P&P Bond may also cover defective materials and workmanship for some time period after acceptance of the work. This is referred to as a maintenance period, and the bond that may specifically cover it carries the same name.

There are times when the obligee (party protected by the bond) wants two years of maintenance. If that is longer than the performance bond provides, an additional bond is needed. There are also cases in which no maintenance period is automatically provided by the P&P bond, so there must be a separate bond if the protection is desired.

Why is the Risk Relatively Low on a Maintenance Bond?

Assume "Surety A" provided a P&P bond on a contract. They already faced the risk of the project not being performed properly. Having now passed that exposure, it is a small step to guarantee the materials and workmanship that went into the project. For this reason, a Maint. Bond following a P&P Bond issued by the same surety, may be much less expensive than the related P&P Bond, and would be freely given.

Sometimes They Play Hard to Get

There are a couple of factors that can make these bonds difficult to obtain.

 

  • No P&P Bond - If no P&P bond was issued, the underwriter will be justifiably suspicious if a maint. bond is requested. Perhaps the obligee regrets not having obtained a P&P bond or was unwilling to spend the money for one. Now they want a cheap alternative that can still cover the entire project. Maybe they observed a suspected defect in the work and belatedly want the protection of a surety bond.
  • Different sureties - If Surety A wrote the P&P bond, Surety B will obviously ask why "A" is not also handling the maint. bond. Maybe "A" knows there was a problem on the contract and they want to run away from it while they can. The only good candidate for the maintenance bond is the surety that issued the Performance bond.
  • Low percentage maintenance obligation - often the maintenance bond is issued for less than 100% of the contract amount. It may be for 20%. You have a low dollar amount, but it still covers the entire project. This is an unappealing situation for the surety. But it is one they will tolerate If they already reaped the benefit of issuing the P&P bond.
  • Low rates - They are normally lower than Performance bond rates because... (*why do you think?) This makes them less rewarding for the surety.
  • Difficult guarantees - May cover efficient or successful operations instead of the normal "defective materials and workmanship." This is a far more difficult guarantee for the surety to provide. Many are unwilling to provide such bonds.

 

Solutions

The only alternative to a bond may be a "cash" type alternative such as a Standby Irrevocable Letter of Credit issued by a commercial bank. The client may not think this is a great solution, and there will be no commission for the agent, but there are not many options at this point.

ilearn.stanford.edu/eportfolios/1666/tano/2021_Network_Appliance_NS0194_Exam
ilearn.stanford.edu/eportfolios/1672/Ramona_/2021_Network_Appliance_NS0302_Exam
ilearn.stanford.edu/eportfolios/1678/Home/2021_Network_Appliance_NS0515_Exam
ilearn.stanford.edu/eportfolios/1666/tano/2021_Network_Appliance_NS0526_Exam
ilearn.stanford.edu/eportfolios/1672/Ramona_/2021_Network_Appliance_NS0592_Exam

One consolation is that maintenance bonds are often written for a small percentage of the contract amount. So cash in lieu of bonds may be feasible.

b. Obligee's name

c. Job description and project number

d. Bid bond percentage or dollar amount



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