TL;DR: A bid bond is a surety bond issued to project owners to ensure that a winning contractor will enter into a contract under the terms of their bid. If the contractor fails to do so, the bond compensates the project owner—usually up to 10% of the bid. Bid bonds are used to reduce risk, ensure contractor credibility, and protect against financial loss in unstable markets.
By Gary Swiftbonds, nationally recognized expert in surety bonds, bid bonds, and performance bonds.
So what is a bid bond? And why do you need one?
Bid Bond
Most bid bonds contain a cash deposit, which is subject to full or partial forfeiture if the winning contractor fails to either execute the contract (or come up with a payment bond or performance bond – depending on how the bid process is structured). The bid bond assures that, should the bidder be successful, they will sign the deal and provide the required surety bond.
The Bid Bond prequalifies the principal and provides the necessary security to the owner or general contractor, or “obligee,” guaranteeing that the principal will enter into the contract, if it is awarded.
It’s a Guarantee
A Bid Bond guarantees that the “obligee” will be paid the difference between the principal’s tender price and the next closest tender price. This action is only triggered should the principal be awarded the contract but fails to enter into the contract, as agreed, with the obligee. The bid bond penalty is generally ten percent of the bidder’s tender price. Contractors prefer the use of Bid Bonds because they are a less expensive option and they do not tie up cash or bank credit lines during the bidding process. Owners and general contractors also use Bid Bonds because they establish and confirm that the bidding contractor or supplier has the support of a Surety Company and is qualified to undertake the project.
Frequently Asked Questions
What is a bid bond?
A bid bond is a surety bond issued to a project owner that guarantees a contractor will honor the bid and enter into the contract if awarded, or else compensate the owner for financial loss.
Why do project owners require bid bonds?
Project owners require bid bonds to reduce risk, ensure only qualified contractors bid, and protect against losses if a winning bidder refuses or is unable to proceed with the contract.
How does a bid bond protect the project owner?
If the winning contractor fails to sign the contract or provide required performance and payment bonds, the bid bond compensates the owner—usually for the difference between the winning bid and the next lowest bid, up to the bond amount.
How much is a typical bid bond amount?
Most bid bonds are set at about 5% to 10% of the total bid amount, with 10% being the most common penalty limit in public and private projects.
Who are the parties involved in a bid bond?
The three parties are the principal (the contractor), the obligee (the project owner or developer), and the surety (the bonding company that guarantees the contractor’s obligation).
Does a bid bond require cash or collateral?
In most cases, contractors do not need to post cash or collateral. Bid bonds are usually issued based on creditworthiness and financial strength, helping avoid tying up cash or bank lines.
What happens if a contractor wins a bid but refuses the job?
If the contractor refuses to proceed, the project owner can file a claim on the bid bond to recover financial losses, typically up to the bond’s penal sum.
Is a bid bond required for all construction projects?
Bid bonds are commonly required on public projects and many private developments, but requirements vary by owner, contract type, and local regulations.
How is a bid bond different from a performance bond?
A bid bond guarantees the contractor will enter the contract if awarded, while a performance bond guarantees the contractor will complete the project according to contract terms.
How can a contractor obtain a bid bond?
Contractors usually obtain a bid bond through a surety broker or agent by submitting financial information, project details, and credit history for underwriting review.
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See here for our California Bid Bonds, and more on Texas bid bonds or a Florida Bid Bond