A Primer on Bid Bonds
January 10, 2023
In this Surety Today Blog post we will discuss Bid Bonds. As everyone knows, bid bonds are part of the standard governmental procurement process. The RFP and applicable statutes or governing regulations for governmental procurement will typically require that any bidding party must provide a bid bond with its bid. These statutes, regulations and/or RFP will typically describe the requirements of the bid bond – amount, terms, duration, form, requirements for acceptability of the surety, etc. For example, the FAR’s bid guarantee provision, FAR 52.228-1, provides in relevant part:
(a) Failure to furnish a bid guarantee in the proper form and amount, by the time set for opening of bids, may be cause for rejection of the bid.
(b) The bidder shall furnish a bid guarantee in the form of a firm commitment, e.g., bid bond supported by good and sufficient surety or sureties acceptable to the Government
(c) The amount of the bid guarantee shall be _____ percent of the bid price or _____, whichever is less.
(d) If the successful bidder, upon acceptance of its bid by the Government within the period specified for acceptance, fails to execute all contractual documents or furnish executed bond(s) within 10 days after receipt of the forms by the bidder, the Contracting Officer may terminate the contract for default.
(e) In the event the contract is terminated for default, the bidder is liable for any cost of acquiring the work that exceeds the amount of its bid, and the bid guarantee is available to offset the difference.
Standard Form 24, the standard federal procurement bid bond form, provides in relevant part:
THEREFORE: The above obligation is void if the Principal – (a) upon acceptance by the Government of the bid identified above, within the period specified therein for acceptance (sixty (60) days if no period is specified), executes the further contractual documents and gives the bond(s) required by the terms of the bid as accepted within the time specified (ten (10) days if no period is specified) after receipt of the forms by the principal; or (b) in the event of failure to execute such further contractual documents and give such bonds, pays the Government for any cost of procuring the work which exceeds the amount of the bid.
It has been recognized that the purpose of a bid bond is to protect a contracting agency from an awardee’s default by compensating the agency for costs incurred in reprocuring the contract or reissuing the award to a more expensive runner-up. See Matter of G2G, LLC, B-416502, 2018 WL 4679148, at *2 (Comp. Gen. Sept. 27, 2018).
Under a typical sealed bid procurement, after the bids are opened the contract is awarded to the lowest responsive and responsible bidder. It is important to note that the bid bond is part of the determination of whether the bid is responsive. A “responsive” bid means the bid must be an unqualified offer to perform in strict accordance with the RFP. If there are mistakes in the bid bond the entire bid can be rejected by the owner, so the surety, agent and principal need to be careful when the bid bonds are being issued. The case of Leeward Constr., Inc. v. United States, 160 Fed. Cl. 446, 451 (2022) is a good example of this principal. In Leeward, the bidder submitted its bid with an AIA A310 bid bond form instead of the Standard Form No. 24. The A310 Form included a provision that limits the liability of the bidder in the case of default to “the difference, not to exceed the amount of this Bond, between the amount specified in said bid and such larger amount for which the [contracting agency] may in good faith contract with another party[.]”
The court held that the A310 bond form failed to satisfy the requirements of the FAR and the difference in language was material and rendered the bid non-responsive. At least if the bid is rejected, there can be no claim against the bid bond, but I imagine the bidder in that case may have a potential claim against its agent or surety.
The penal sum on a bid bond is typically expressed as a percentage, such as 5% or 10% of the bid amount. In some cases, the bond amount is expressed as a percentage of the bid with a cap amount. The surety’s maximum liability to the obligee is the penal sum on the bid bond. Chas. H. Tompkins Co. v. Lumbermens Mut. Cas. Co., 732 F. Supp. 1368, 1372–73 (E.D. Va. 1990). The reason the bond’s penal sum is expressed as a percentage as opposed to a specific dollar amount is to eliminate the last minute insertion of a specific dollar amount as most bids are not completed by the principal until the last minute before submission.
The manner in which a typical bid bond works can best be explained using an example. Example: Assume that when the bids were opened on a hypothetical procurement the principal’s bid was $500,000. The next low bidder’s bid was $550,000; thus the principal’s bid is the low bid. The bid bond submitted with the bid had a penal sum of 5% of the bid. When the award is made to the principal as the lowest bidder, and the principal refuses to sign, then the Obligee awards the contract to the next low bidder at $550,000, incurring $50,000 in “damages.” The difference between the principal’s bid and the amount of the contract ultimately awarded is the amount of damages, but in this case, the damages would be limited under the bid bond to the 5% of the principal’s bid ($500,000) or $25,000 under this example.
There are two general types of bid bonds – “Forfeiture” and “Damages.” In a “forfeiture” bid bond the surety forfeits or pays the penal sum on the bid bond whenever liability is established, regardless of the amount of actual damages or whether the obligee has incurred any damages at all. In a “damages” type bid bond the surety will typically be required to pay the difference between the principal’s bid and the next lowest bidder, not to exceed the penal sum of the bond.
Ordinarily, the bidder who is awarded the contract obtains the required performance and payment bonds from the same surety that issued the bid bond. That is why bid bonds are generally offered for nominal premiums. However, unless the governing statutes, regulations or RFP terms require otherwise, the surety that issues the bid bond is typically not required to issue the payment and performance bonds. See L & M Enters. v. Hartford Acc. & Indem. Co., 700 F. Supp. 517 (D. Colo. 1988); Green River Gas Co. v. United States Fidelity & Guar. Co., 557 S.W.2d 428 (Ky. Ct. App. 1977); Travelers Indem. Co. v. Buffalo Motor & Generator Corp., 58 A.D.2d 978, 397 N.Y.S.2d 257 (1977). Generally, the GAI or bond application documents make it clear that the surety is not obligated to issue any bonds it chooses not to.
A surety faced with a claim on its bid bond, must of course review the terms of the bond, RFP and any governing statute to determine its exposure. In addition, the surety must also evaluate whether the bid submitted was responsive and whether the government acceptance was timely, proper and in accordance with the RFP. It is generally recognized that the government’s failure to adhere to the method and procedures outlined in bidding instructions for making the award can preclude liability of the surety for default on bond. See e.g. Hanover Area School Dist. v. Sarkisian Bros., Inc., 514 F. Supp. 697 (M.D. Pa. 1981). For example, in one case the bid was identified as only being good for 30 days and the government did not make the award until after the bid had expired. City of Fairfield v. Harper Drilling Co., 692 N.W.2d 681, 685 (Iowa 2005). In that case, the government “conditionally accepted” the bid subject to approval by another agency. That approval was not obtained until after the 30 days had passed. The court noted that “[a] governing body’s acceptance of a bidder’s proposal to enter into a contract must be absolute and unconditional to be binding upon the parties. (citations omitted) If the governing body conditionally accepts a bid, no binding award of a contract exists between the governing body and the bidder. An award does not create a contract when the governing body conditions its validity on the approval of another agency.” The surety was not liable on its bid bond in that case.
In another case, the government decreased the amount of pipe involved in the project by a significant amount when it made the award to the bidder. The court held that the change invalidated the award and the bid bond was not liable. See Northeastern Constr. Co. v Winston-Salem, 83 F2d 57 (4th Cir. 1936). In still another case, as part of the award the government rejected the bidder’s planned supplier which would have impacted the bidder’s pricing. The court held that such action nullified the award and the surety was not liable under the bid bond. See Commissioners of Sewerage v National Surety Co., 145 Ky 90, 140 SW 62 (1911).
The surety must pay attention to what action the government is relying on to assert its claim. In one case, the award was made and under the terms of the procurement law the bidder had a period of time to get its social economic compliance in order. The bidder could not contract with one of the MBE contractors identified in its bid and instead used a different MBE contractor. The government rejected that action and made claim against the bid bond. The court held that after the award was made, any such claim relating to contract compliance should have been made under the performance bond, not the bid bond. Jay Dee/Mole JV v. Mayor and City Council of Baltimore, 725 F. Supp.2d 513 (D. Md. 2010).
Another issue for the surety to consider in addressing bid bond claims is the concept of good faith mistakes or clerical errors. Occasionally, a bidder will make a good faith mistake in computing its bid or tabulating its numbers, which makes its bid erroneous. Many courts follow the rule that where there is some reasonable excuse for an error in calculating the bid, and the party receiving the bid knows of the mistake at the time the bid is accepted, the contractor may have it rescinded in equity. Peerless Casualty Co. v Housing Authority of Hazelhurst, 228 F.2d 376 (5th Cir. 1955). Some courts use the following factors to evaluate an erroneous bid situation: (1) if the bidder acted in good faith (2) without gross negligence, (3) if he was reasonably prompt in giving notice of the error in the bid to the other party, (4) if the bidder would suffer substantial detriment by forfeiture, and (5) if the other party’s status had not greatly changed and relief from forfeiture would work no substantial hardship on him. Puget Sound Painters, Inc. v State, 45 Wash 2d 819, 278 P2d 302 (1954). See also FAR §14-407-3(a) and Brommel Contr. v. U.S., 596 Fed.2d, 448 (Ct. Cl. 1979) for the federal treatment of mistakes.
Bid bonds are an integral part of the governmental construction bidding process. If you have any questions regarding this blog post please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com) or any member of the Surety and Fidelity Law Group.