Bonds for Tendering
There are three common forms of surety used at the pre-tendering or tendering stage.
A pre-qualification letter is not a bond, nor is it a legal commitment. It is a letter from the surety to the owner that confirms the “bondability” of its contractor client. By issuing this letter, the surety is acknowledging its business relationship and familiarity with the contractor. A pre-qualification letter is not binding.
A pre-qualification letter is used at the Request for Qualification (RFQ) or Expression of Interest (EOI) stage. An owner has the comfort of knowing the contractor has a relationship with the surety and the surety has a sufficient level of confidence in the contractor.
Consent of Surety
A consent of surety is also commonly referred to as an agreement to bond. It is a legal commitment, but it is not a true bond as it is only executed by the surety, not the contractor.
It confirms to the project owner that should the contractor be awarded the job and execute the contract, the surety will provide the performance and/or payment bonds as per the terms outlined in the consent of surety. BUT, it is not an assurance that the contractor will enter into the contract, nor that the contractor will enter into the contract at the price quoted in the tendering process.
For a surety to step back from this obligation to issue performance bonds, it is likely that new and significant information has come to light between the bid and award phase.
A bid bond is the most commonly used risk management tool at the tender stage. It is a legal instrument, enforceable by law and is a three-party agreement with specific obligations required by each party. A bid bond provides assurance to the project owner from the surety that the bidder is not only qualified, but they will take their tendering obligations seriously and will follow through on their commitments.
Bid bonds provide prequalification assurances that go hand in hand with performance and payment bonds. In other words, for a surety to provide a bid bond for a contract, the contractor must be pre-qualified and must meet the surety’s criteria to be bondable from a performance perspective.
Should a contractor not enter into a contract after a bid bond has been posted, this will result in a claim against the bond for which the contractor will be held responsible (corporately and usually personally) for reimbursing the bonding company.