Most Federal, State and Municipal projects give contractors the option of bidding the project with a cashier’s check. Learn more about the pros and cons of this method compared to other financial security such as surety bonds.
A Cashier’s Check is a payment instrument that draws funds from a financial institution. Unlike a personal check, a cashier’s check draws funds from the financial institution instead of a business or personal account’s funds. Therefore cashier’s checks are considered safe because they have the financial backing of the institution. Cashier’s checks are often watermarked and signed by two or more employees of the financial institution.
Contractors are often required to post bid security to bid a project. Generally, the bid security can be in the form of either a bid bond, or a cashier’s check.
There are good reasons why a contractor may want to bid with a cashier’s check. For one, they can be very easy to get. If a contractor has enough funds available at the financial institution, they can usually obtain a cashier’s check very easily and at little cost.
A second reason is often time. Cashiers checks can be obtained very quickly. However, it may take time for a contractor to get approved for a bid bond. A contractor generally must go through underwriting known as the 3Cs. This can take a day or longer depending on the size and complexity of the bid. In these scenarios, it may benefit the contractor to bid the project using a cashier’s check while working to formalize a bond program. The contractor can always provide performance bonds and payment bonds if the project is awarded and get their cashier’s check returned.
There are also legitimate reasons not to bid a project with a cashier’s check.
While using a cashier’s check can buy the contractor time, it is a risk if the contractor will have issues obtaining bonding. Most bids will allow the cashier’s check to be in a small amount such as 5% of the project. However, if awarded, the contractor usually must provide financial security for 100% of the project such as Performance Bonds and Payment Bonds or an Irrevocable Letter of Credit. If a contractor cannot obtain one of these guarantees, they may be forced to forfeit their cashier’s check. Therefore, this method should only be used when the contractor is confident that they can replace their cashier’s check with contract bonds or an ILOC.
Another reason that contractors may want to reconsider using a cashier’s check is that it leaves them no defense to a dispute or a mistake. For example, suppose a contractor transposes a number on their bid. This is normally a valid defense under a bid bond and a trained surety professional would step in to investigate a claim. On the other hand, a cashier’s check would likely be cashed and the contractor may have to litigate to get their money returned.
The third disadvantage to using a cashier’s check is that it ties up resources such as cash. A bidding contractor will have to use cash to obtain the cashier check. This is cash that cannot be used for operations or growth. This can also be problematic if the contractor wants to bid multiple projects.
Alternatively, surety bonds are considered unsecured credit. Bid bond companies do not generally file liens on assets unless a claim takes place. Therefore a contractor can use cash, equipment and other assets for operations or growth.
Cashier’s checks can be a great way to help contractors bid projects in a pinch or on a short term basis. However, it is usually better for contractors to get set up with a contract bond program. These programs allow contractors to maximize their assets at a low cost.