From 1951 to 1959 Dragnet was a defining police series that featured Jack Webb as Sgt. Joe Friday. Joe was famous for an interrogation line he often used: “Just the facts, ma’am!”
Bonding companies need to gather facts too, when a bid bond has been issued. It is an important process with implications for both the surety and the contractor.
So here are the facts, ma’am!
Bid results are the various proposal amounts submitted by contractors pursuing a particular project. The bids are submitted at a designated time and place. The list of low bidder, second, third, etc., including the company name and $ amount, are the bid results.
The first party to know this info may be the contractor. They often attend the bid opening and write down the results. Remember, they have a vested interest in the outcome. They’re hoping to acquire a new project.
It is important for them to report the results promptly to the bonding company. Here’s why:
Timely Issuance of Performance Bond
If the contractor is low bidder (offering the most favorable price to do the work), an award can be expected. The performance and payment bond will be needed by a set date to avoid loss of the project. Reporting the bid results is the first step in this process.
Excessive Bid Spreads
A “bid spread” occurs when there is a significant (>10%) difference between the low and the second bidder. This is a red flag for the surety and contractor. All the bidders wanted the work. They spent time and money developing their proposal. An excessive bid spread means the low bidder has a unique advantage (better expertise, prior experience, special equipment, lower material prices, etc.) over the other bidders OR they made a bid mis-calculation and are underpriced. (*Why is this a concern?)
If the contractor has a special advantage, they must share this info with the bonding company in order to obtain the P&P bond when required. The surety must be confident that the project will be completed properly.
If they made an error, they must notify the obligee / project owner that they wish to withdraw their bid. If done promptly, they may avoid having a bid bond claim (for failing to move forward.)
When a bid bond is issued, underwriters consider a portion of the contractors surety line to be in use – under the expectation that they may win the project and need a P&P bond. If the contractor / bidder is not the low bidder, the capacity is restored to their surety line to support another project – as soon as the surety is notified.
For all these reasons, the prompt reporting of bid results is necessary. A tight bid is a win for the contractor and surety. The bidder acquires additional sales volume and the surety books a premium. It’s how we all make money.
* Why is an excessive bid spread a concern?
If the contractor proceeds with a project that is underpriced, they may end up losing money on the work.
It’s an issue for the surety too, because they are the guarantor of the project. They must complete the work if the contractor defaults, and they rely on the fact that the contract amount is adequate to accomplish this. If it is not, the surety could face a net loss.
Excessive bid spreads are bad for everyone, even the obligee. If they award an underpriced project, they may end up with poor workmanship, missed deadlines and possibly a defaulted contract, ma’am!