So what is a bid bond? And why do you need one?
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.