A bond is required in accordance with the customers tender document (invitation to submit a bid). The purpose is: guarantee that the supplier will accept the job and honor the contract if chosen as the successful bidder. assure that the suppliers bid is in 'good faith'. To assure that the supplier will post a performance bond.

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Cost, Pricing, and Payment - Bonds

6 important questions on Cost, Pricing, and Payment - Bonds

What is a disadvantage of bonds?

Bonds are costly, and may make it difficult for a supplier to identify revenue for a sale. Eventually someone pays the cost

What are bid bonds?

A bond is required in accordance with the customers tender document (invitation to submit a bid). The purpose is:

guarantee that the supplier will accept the job and honor the contract if chosen as the successful bidder.
assure that the suppliers bid is in 'good faith'.
To assure that the supplier will post a performance bond.

What are characteristics of bid bonds?

Bid bonds are

Generally from i percent to 10 percent of the value of the bid
term or validity period of the bond is usually the time period the bid is valid, but can be extended at the request or demand of the customer
If the supplier is chosen as the successful bidder, they keep the bid bond active until a contract is signed and a performance bond is posted.
If they are not chosen as the successful bidder, the bond will be returned.

What are performance bids?

These takes over after the contract has been signed and replaces the bid bond to make sure the supplier performs as agreed to in the contract.
The term of the performance bond is either receipt of an acceptance certificate for the job, or acceptance date plus any warranty period.
Usually have a value from 5 percent to 10 percent of the contract value, but could range as high as 100 percent.

What are Advance payment bonds?

Required only if the supplier makes an advance payment on the project. The value of the bond matches the value of the advance payment, be extended or called in by demand of the customer. Advance payment is common in the Middle East.

What is a warranty bond?

This bond is a negotiated item and not standard procedure. If the supplier agrees to provide an extended warranty, the customer request a warranty bond to cover the period of the extended warranty.

If the supplier does agree ro extend the warranty, they must consider the cost this bond in addition to other costs.