Bid Bond

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Bid Bond: Definition, How It Works, and Key Differences from Performance Bonds

What is a bid bond?

A bid bond is a financial guarantee provided by a bidder (usually a contractor) to a project owner that the bidder will enter into the contract and provide required performance/payment bonds if awarded the job. It protects the project owner against a winning bidder who fails to honor their bid or execute the contract.

Key takeaways

  • A bid bond assures the owner that the bidder is financially capable and committed to the project.
  • It is typically required with a bid on public and many private construction projects.
  • Bid bonds are issued by surety companies after underwriting the contractor’s financial strength and experience.
  • If a winning bidder defaults, the surety may pay the owner an amount (often the bid bond penalty) and seek reimbursement from the contractor.
  • Once the contract is executed and work begins, the bid bond is replaced by a performance bond.

How bid bonds work

  • Purpose: Discourage frivolous bids, reduce owner risk, and ensure serious bidders can perform at their quoted price.
  • Submission: Contractors include a bid bond with their proposal. Public projects commonly require bonding.
  • Underwriting: A surety evaluates the contractor’s credit, experience, financial statements and business history before issuing the bond.
  • Enforcement: If the awarded bidder refuses to sign the contract or cannot obtain required performance bonds, the owner may make a claim on the bid bond.

Typical requirements and costs

  • Common penalties: Owners often require 5–10% of the bid amount as the bond penalty; federally funded projects commonly require 20%.
  • Premiums: Contractors pay a premium to the surety, influenced by project jurisdiction, bid size, contract terms, and the contractor’s financial profile.
  • Example: For a $250,000 federal roofing bid with a 20% requirement, the bond penalty would be $50,000; the contractor pays a fraction of that as the surety premium.

Obtaining and writing a bid bond

  • Issuance: A surety issues the bond after vetting the contractor. The bond may be a separate written instrument or delivered as part of the bid package.
  • Evaluation factors: Credit history, years of experience, financial statements, bonding capacity, and prior project performance.
  • Form: The bond names the obligee (project owner), principal (contractor), surety, and states the penalty and conditions.

Parties involved

  • Obligee — the project owner who requires the bond and is protected by it.
  • Principal — the bidder/contractor who purchases the bond and whose obligations are guaranteed.
  • Surety — the bonding company that guarantees payment to the obligee if the principal defaults. The surety can pursue reimbursement from the principal.

Bid bond vs. performance bond

  • Bid bond: Guarantees the bidder will enter into the contract and provide required bonds if awarded. It is submitted with the bid.
  • Performance bond: Replaces the bid bond after contract award and guarantees the contractor will perform the work according to contract terms. It compensates the owner for defective or incomplete work.

Failure to meet obligations and liability

  • If a winning bidder defaults, the owner can claim against the bid bond for losses (commonly the difference between the lowest and next-lowest bid).
  • The surety typically pays the obligee and may then seek recovery from the contractor per the bond terms.
  • The contractor and surety can be jointly and severally liable depending on the bond language.

Common questions

Bottom line

Bid bonds are a standard risk-management tool in bidding processes—especially in construction—assuring owners that bidders are serious and financially able to perform. They require underwriting by a surety and are generally replaced by performance bonds once a contract is awarded.