Tuesday, April 13, 2010

Bid Bonds

As part of the tendering process in Oman, bidding contractors will often arrange for a third party guarantor (usually a bank or insurance company) to issue a bid bond on their behalf to the project owner, as a guarantee that the winning bidder will perform its contract in accordance with the terms of its bid. The bid bond is subject to full or partial forfeiture if the winning bidder fails to either execute the contract or replace the bid bond with the requisite performance bond.

Bid bonds typically range in value from one to three percent of the tender contract price. Under Omani law, a bid bond must be for at least one percent of the contract price or project value, and the bid bond must have a minimum duration of ninety days (which is extendable). A bidder seeking to withdraw its bid after the bid opening will lose the bid security. Unsuccessful bidders are reimbursed for the bid bond upon losing the tender.

Pursuant to the new Tender Law issued by Royal Decree 36/08, non-submission of the requisite bid bond with the bid can be grounds for disqualification of the bid. The winning bidder must replace the bid bond with a performance bond for five percent of the contract price within ten days (for foreign bidders, twenty days) of being notified of the acceptance of the tender. Failure to provide the performance bond within the stipulated number of days can result in the full amount of the bond becoming payable to the owner of the project as compensation for the default and, additionally, could lead to cancellation of the award.

Consultancies, being specialist “knowledge industries” without adequate assets for issuing bid bonds/guarantees, can be required to submit professional indemnity insurance (in lieu of a performance bond) that provides cover from claims for alleged negligence or breach of duty arising from an act, error or omission in the performance of professional services. However, in competitive bids, the clients may require bid bonds from consultants to discourage and eliminate non-serious bidders.

The new Tender Law has a much wider scope than its predecessor and seeks to encompass all units of the government apparatus, including quasi-government entities such as state-owned enterprises, regulatory bodies and public establishments. The Tender Law delineates five different types of procurement processes for works and services. These include procurement by public tender, direct award and restricted tender. The Tender Law provides that a bid bond is not required for works or services accepted pursuant to awarding a contract directly. The law also specifies the circumstances for direct award of a contract based on necessity, contract value, best commercial terms and winning entry of a competition for designs or studies.