6.3 Bidding Procedures & Surety Bonds

Bidding Procedures & Surety Bonds

Public and private construction procurement relies on formal bidding procedures to establish project pricing and select contractors. Additionally, project owners—especially public entity owners—require Surety Bonds to guarantee performance and protect subcontractors against financial default.

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1. Public vs. Private Bidding Procedures

Construction bidding is governed by formal protocols designed to ensure fair competition and fiscal integrity.

Key Bidding Steps & Terminology

1. Invitation for Bids (IFB) / Request for Proposals (RFP): Public advertisements or private notices specifying project scope, instructions, pre-qualification requirements, and bid submission deadlines.
2. Pre-Bid Conference & Site Walkthrough: Mandatory or optional meetings where potential bidders inspect jobsite conditions and submit requests for clarification.
3. Addenda: Written legal instruments issued by the owner or architect during the bidding period that modify, clarify, or extend project contract documents. All addenda must be explicitly acknowledged on the bid form. Failure to acknowledge an addendum makes the bid non-responsive and subject to automatic rejection.

                         BID SELECTION EVALUATION
                                   |
        +--------------------------+--------------------------+
        |                                                     |
  RESPONSIVE BIDDER                                    RESPONSIBLE BIDDER
  • Submitted on time                              • Financial capacity & net worth
  • Completed all bid form fields                  • Adequate bonding capacity
  • Acknowledged all addenda                       • Technical experience & licensing
  • Included valid bid security                    • Satisfactory safety record (EMR)

Award Criteria

Public agency contracts in Florida (under F.S. 255.20) must generally be awarded to the lowest responsive and responsible bidder:

• Responsive Bidder: A contractor whose bid complies fully with all material terms of the solicitation documents.
• Responsible Bidder: A contractor who possesses the financial capability, technical competence, equipment, bonding capacity, and integrity to complete the work.

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2. Fundamentals of Surety Bonding

A Surety Bond is a legal instrument that guarantees a contractor will fulfill specific contractual obligations. It is fundamentally different from traditional commercial insurance.

The Tri-Partite Surety Relationship

A surety bond involves three distinct parties:

                      OBLIGEE (Project Owner)
                     /                      
                    /                        
       Bond Protection                        Contract Obligation
                  /                            
                 /                              
  SURETY (Bonding Co.) <--- Indemnity Agreement ---> PRINCIPAL (General Contractor)

1. Principal: The General Contractor who purchases the bond and promises to perform the contract.
2. Obligee: The Project Owner (or public agency) protected by the bond.
3. Surety: The financial institution (bonding company) that guarantees the principal’s performance.

Comparison: Surety Bonds vs. Insurance Policies

Underwriting: The 3 Cs of Surety Credit

Surety underwriters evaluate a contractor's bonding capacity based on three primary criteria:

• Character: Business reputation, integrity, references, and track record of paying obligations.
• Capacity: Technical experience, plant equipment, key staff competency, and current work-in-progress (WIP).
• Capital: Financial strength, net working capital, current financial ratio, and corporate net worth.

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3. Types of Construction Surety Bonds

  BID BOND                  PERFORMANCE BOND             PAYMENT BOND
  (5% to 10% of Bid)        (100% of Contract)           (100% of Contract)
  • Guarantees GC will      • Guarantees project completion • Guarantees payment to
    sign contract & provide   if GC defaults.              subcontractors & material
    final bonds.                                           suppliers (prevents liens).

A. Bid Bond

• Purpose: Guarantees that if the contractor is awarded the contract, they will execute the agreement and supply required performance and payment bonds.
• Penal Sum: Typically 5% to 10% of the total bid proposal price.
• Default Penalty: If the low bidder refuses to execute the contract, the surety must pay the Obligee the difference between the low bid and the next lowest bid, up to the maximum penal sum of the bond.

B. Performance Bond

• Purpose: Protects the owner against financial loss if the contractor defaults or fails to perform the work according to plans and specifications.
• Penal Sum: Usually 100% of the contract price.
• Surety Options upon Default: If the contractor defaults, the surety may:
  1. Financial financing: Assist the principal to complete work.
  2. Takeover: Assume control and complete the project using a replacement contractor.
  3. Tender: Select a new contractor to contract directly with the owner.
  4. Pay out: Pay the owner the net cost of completion up to the penal sum limit.

C. Payment Bond

• Purpose: Guarantees that the contractor will pay all valid claims from subcontractors, material suppliers, and laborers working on the project.
• Penal Sum: Usually 100% of the contract price.
• Significance: On public projects where mechanics' liens cannot attach to public property, payment bonds serve as the exclusive financial protection for subcontractors.

D. Maintenance / Warranty Bond

• Purpose: Guarantees against defects in workmanship or materials for a specified period (typically 1 to 2 years) following substantial completion.

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4. The Miller Act & Florida Little Miller Act (F.S. 255.05)

Because public property owned by government entities cannot be subjected to mechanics' liens under Florida Lien Law (F.S. 713), statutory bonding acts were enacted to protect sub-tier claimants.

Federal Miller Act (40 U.S.C. 3131-3134)

Requires performance and payment bonds on all federal public works contracts exceeding $150,000.

Florida Little Miller Act (Florida Statutes § 255.05)

Mandates that any contractor entering into a public building or public works contract with the State of Florida, county, city, or public board exceeding statutory thresholds must execute and record a 100% Payment and Performance Bond before commencing work.

Statutory Notice & Lawsuit Deadlines under F.S. 255.05

Subcontractors and suppliers who are not in privity of contract with the General Contractor must adhere strictly to statutory notice timeframes to maintain rights against the payment bond:

  DAY 0                   DAY 45                  DAY 90                  1 YEAR
  +-----------------------+-----------------------+-----------------------+
  First Work              Notice to Contractor    Last Work               Lawsuit Deadline
  Furnished               Served                  Notice of Nonpayment    Action on Bond
                                                  Served                  Filed in Court

Exam Key Point: A subcontractor in direct privity with the general contractor is exempt from serving a Notice to Contractor, but must still comply with serving a Notice of Nonpayment within 90 days and instituting litigation within 1 year.