What is a Bid Bond?

A bid bond guarantees compensation to the bond owner if the bidder fails to begin a project. Bid bonds are often used for construction jobs or other projects with similar bid-based selection processes.

The function of the bid bond is to provide a guarantee to the project owner that the bidder will complete the work if selected. The existence of a bid bond gives the owner assurance that the bidder has the financial means to accept the job for the price quoted in the bid. Bid bonds ensure that contractors can comply with bid contracts and will fulfill their job responsibilities at agreed prices. Most public construction contracts require contractors or subcontractors to secure their bids by providing bonds that serve as a means of legal and financial protection to the client.

Without bid bonds, project owners would have no way of guaranteeing that the bidder they select for a project would be able to complete the job properly. For example, an underfunded bidder might run into cash flow problems along the way. Bid bonds also help clients avoid frivolous bids, which saves time when analyzing and choosing contractors.

While most project owners typically require between 5 per cent and 10 per cent of the tender price upfront as a penalty sum, federally funded projects require 20 per cent of the bid. The cost of the bond depends on several factors, including the jurisdiction of the project work, bid amount, and contractual terms.

For example, a contractor that is making a $250,000 bid to provide roofing for an elementary school will have to submit a bid bond of $50,000. This bid bond is required along with a proposal to be taken seriously as a contender for a federal contract.

A bid bond can be a written guarantee made out by a third-party guarantor and submitted to a client or project owner. The bid bond affirms that the contractor has the required funds necessary to carry out the project.

Typically, bid bonds are submitted as a cash deposit by contractors for a tendered bid. A contractor purchases a bid bond from a surety, which carries out extensive financial and background checks on a contractor before approving the bond.

Several factors determine whether a contractor will be issued a bid bond. They include the company’s credit history and the number of years of experience in the field.

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