THE COST IMPACT OF BONDING AND ESTIMATING protects the owner if the contractor fails to complete the project , and is a more significant cost component , often charged based on a percentage of the project value . The payment bond ensures that subcontractors and suppliers are paid ; like performance bonds , this adds to project costs . These premiums should be factored into the contractor ’ s bid to prevent underbidding , which impacts both the bidding and estimating process .
In terms of risk mitigation , bonding lowers the financial risk for owners , making contractors with strong bonding capacity more appealing in competitive bids . This can encourage more aggressive bidding by contractors who feel confident in their ability to secure bonds .
In addition , contractors who demonstrate strong bonding capacity are seen as more reliable , improving their chances of securing bids ; if a contractor struggles to obtain bonding , it might either raise the cost of the bond - if secured - or limit their bidding capacity .
As far as prequalification is concerned , contractors must submit to a financial review by the surety company to attain bonding . The time and administrative impact of preserving bonding capacity can increase the overhead that contractors need to recover in their bids .
A contractor ’ s bonding capacity limits the size of projects they can bid on ; they must take this into account when estimating project costs , since higher-risk or larger projects could involve greater bonding costs .
It should also be noted that bonding costs will typically be passed onto the project owner by the contractor . If all bidders on a project are required to provide bonds , this levels the playing field , but it also means that owners will face slightly higher costs than they would encounter without bonding requirements . These are known as “ passthrough ” costs .
When contractors are aware that bonds will increase project costs , they may adjust their margins or absorb part of the bond cost to make their bids more competitive . This approach can influence the overall pricing strategy and result in different approaches to the same project .
Bonding is usually mandatory for publicsector projects , which leads to higher initial costs in bidding . In the private sector , however , bond requirements can vary , although projects that demand bonding tend to involve larger or more intricate projects , increasing the costs of bidding .
Overall , bonding affects both bidding and estimating by increasing direct project costs , impacting contractor selection criteria , and influencing the risk management approach of the project . When preparing bids , contractors must account for these costs to avoid eroding profit margins and to ensure they are still competitive .
FIRST QUARTER 2025 CONTRACTOR TOOLS - 23