What is a bid bond (short definition)
– A bid bond is a type of guarantee a bidder delivers to a project owner when submitting a proposal. It promises the owner that, if the bidder is selected, the bidder will enter the contract and provide required follow‑up bonds (typically a performance bond). If the bidder refuses or cannot execute the contract, the owner can recover a specified amount under the bid bond to cover added costs.
Why owners require bid bonds (key purposes)
– Protects the owner from the cost of awarding the job to a higher bidder if the winner walks away.
– Filters out non‑serious or undercapitalized bidders.
– Signals that the bidder has passed some financial underwriting and is likely able to perform.
Core parties and terminology (define jargon)
– Principal: the bidder or contractor who wants the contract.
– Obligee: the project owner or entity that requires the bond.
– Surety: the third‑party guarantor (an insurer or surety company) that issues the bond and promises to pay the obligee if the principal defaults.
– Performance bond: a separate bond issued (or required) after award that guarantees proper performance of the work.
How a bid bond works (step‑by‑step)
1. The bidder prepares a bid and, if required, requests a bid bond from a surety or surety agent.
2. The surety underwrites the applicant — checking credit, financial statements, industry experience and years in business.
3. If approved, the surety issues the bid bond for a stated amount (often calculated as a percentage of the bid). The bidder includes this bond with the bid submission.
4. If the bidder wins and signs the contract, the bid bond is typically released and replaced by a performance bond.
5. If the winning bidder refuses to enter the contract or provide required performance/security, the obligee may make a claim against the bid bond. The surety may pay up to the bond amount, then seek reimbursement from the principal depending on the bond terms.
Typical percentages and cost
– Private owners commonly require bid bonds sized at roughly 5%–10% of the bid price. Federally funded U.S. projects commonly require bid guarantees up to 20% of the bid amount.
– The bidder pays a premium to the surety (a fee, not the full bond amount). The premium rate depends on the applicant’s credit, financial strength, the size of the bond, and jurisdiction. Applicants with weaker credit often face higher premiums, additional collateral, or may be declined.
Requirements underwriters often check
– Business history and years of experience in the trade.
– Credit history and payment record.
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– Financial statements (audited or reviewed balance sheet, income statement, cash-flow projections).
– Current and historical bonding capacity and existing bond obligations.
– Bank references and lines of credit or liquidity sources.
– Backlog (contracts on hand) and recent project references.
– Licensing, certifications, and trade-specific experience.
– Claims, litigation, or default history; receivables and payables aging.
– Personal guarantees or collateral offered by principals, if required.
How bid bonds work (step‑by‑step)
1. Owner issues solicitation specifying a required bid security (percentage or fixed amount).
2. Contractor (bidder) applies to a surety company for a bid bond and supplies underwriting materials.
3. If approved, surety issues a bond that names the owner as obligee and the bidder as principal. The bond guarantees the bidder will enter the contract and provide required performance/payment bonds if awarded.
4. If the bidder wins but refuses or cannot execute the contract, the owner makes a claim up to the bond amount.
5. The surety may pay the owner (often the difference between the defaulting bid and the next acceptable bid, up to the bond amount), or otherwise settle per the bond terms, and then seeks reimbursement from the bidder (indemnity).
Worked numeric example
– Required bid bond: 10% of bid.
– Bidder A submits bid: $1,000,000. Bond amount = $1,000,000 × 10% = $100,000.
– Suppose Bidder A wins but later defaults. The next lowest acceptable bid is $1,040,000. Owner’s loss = $1,040,000 − $1,000,000 = $40,000.
– Owner can claim up to the $100,000 bond; surety pays $40,000 to cover the difference, then seeks reimbursement from Bidder A per the indemnity agreement.
– Premium example (illustrative): surety charges 1.5% on the bond amount. Premium = $100,000 × 1.5% = $1,500 (non‑refundable fee paid by bidder).
Simple formulas
– Bond amount = Bid price × Required bond percentage.
– Premium ≈ Bond amount × Premium rate (rate varies by credit, size, trade; typical ranges for bid‑bond premiums are often lower than for performance bonds and may be <1%–3% for creditworthy contractors, but can be materially higher for weaker profiles).
Checklist for bidders (practical steps)
– Early: confirm bid‑bond requirement (percentage, form, obligee name) in the solicitation.
– Gather underwriting pack: recent financial statements, bank reference, work history, current backlog, list of owner references.
– Contact a licensed surety or an agent/broker that writes bonds in the project’s jurisdiction.
– Review the indemnity agreement before signing—understand personal guarantee and collateral provisions.
– Obtain the original bond (not a copy) and submit with your bid per tender instructions.
– Keep evidence of submission and communications.
Checklist for owners (procurement controls)
– Specify acceptable forms of bid security and exact obligee name in solicitation.
– State required bond percentage (commonly 5%–20% depending on owner/funding).
– Require a bond form acceptable
acceptable to the obligee and licensed in the project jurisdiction. – Require the surety to be licensed to write bonds where the work will be performed and list the surety’s name and contact details on the bond. – Require pre‑award verification of the bond (contact the surety to confirm authenticity and that the bond will remain in force through award). – State conditions and timing for return or release of bid bonds (for unsuccessful bidders and for the successful bidder once performance security is posted). – Define remedies and documentary evidence the owner will accept to make a claim under the bid bond (e.g., copy of award letter, bidder’s failure to enter into the contract within X days). – Keep copies of all submitted bonds and communications; require the successful bidder to promptly provide the original bid bond and subsequent performance/payment bonds.
Common problems and how to mitigate them
– Fake or altered bonds: verify with the surety before award. Require original bond (not a fax or PDF alone) and call the surety’s main office or licensed agent to confirm. – Late submission or wrong obligee name: specify obligee name exactly in the solicitation and enforce a strict cut‑off for timing/format. – Unacceptable surety: maintain a list of approved sureties or require sureties listed on a government roster (e.g., Treasury Circular 570 for federal work in the U.S.). – Dispute about the claim: document the owner’s basis for claiming the bond (show the bidder failed to sign the contract or provide required performance security). – Collateral surprises: review the indemnity agreement to understand whether the surety can demand personal guarantees or cash collateral from company principals.
How a bid bond works — numeric worked example
Assumptions:
– Bid amount (contract price): $1,200,000 – Owner requires 10% bid bond – Contractor’s surety issues the bond with a 1% premium rate (rate varies with risk/credit)
Calculations:
– Bond penal sum (maximum payable on claim) = 10% × $1,200,000 = $120,000. This is the bond’s face amount. – Surety premium = 1% × $120,000 = $1,200. This is the approximate cost to the bidder (paid to the surety/agent). – If the bidder wins but fails to execute the contract and forfeits the bond, the owner’s recoverable amount is up to $120,000, typically reduced by any savings the owner obtains from re‑letting; the surety investigates before paying.
Notes: premium rates and underwriting requirements vary widely. Strong firms sometimes pay 0.5%–1.5% for a bid bond; weaker firms or high‑risk projects can face higher rates or collateral.
Verifying a bid bond (step‑by‑step for owners)
1. Confirm the obligee name, penal sum (percentage and dollar amount), bond form, and signatures are present. 2. Check the surety’s license and rating (in some jurisdictions, use a government roster such as Treasury Circular 570 for federal work). 3. Call the surety’s underwriting office or the issuing agent to confirm issuance and that the bond covers the solicitation number. 4. Keep a dated record of verification (who you called, time, name, and confirmation details). 5. If in doubt, refuse the bond and request an acceptable form or alternate security.
Bid bond claims and remedies (owner’s perspective)
– Typical trigger: winning bidder fails to sign the contract or to deliver required performance/payment bonds or insurance within the contract timeline. – Owner’s steps: issue a written demand stating the contractual failure; provide evidence (award letter, submission deadline missed); submit the demand to the surety per the bond’s notice provisions. – Surety’s responses: investigate the facts, attempt to obtain cure from the principal, or pay the owner up to the penal sum subject to mitigation (owner’s duty to mitigate damages). – Indemnity: if the surety pays, it will seek reimbursement from the contractor and indemnitors according to the indemnity agreement.
Bid bonds versus other bid security forms (short comparison)
– Bid bond (surety bond): low cash outlay for bidder; backed by surety who guarantees performance to owner; may require indemnity/collateral. – Certified cashier’s check or bank guarantee: cash or near‑cash security; simpler for owners but ties up bidder liquidity. – Letter of credit (standby): bank‑issued, can be used as security; may carry higher fees and bank collateral requirements. Choose based on procurement rules, liquidity implications, and speed.
Practical checklist — what bidders should bring to a bid-bond meeting with a broker
– Latest 2–3 years of audited or compiled financial statements. – Current backlog and pipeline; copies of relevant past contracts. – Bank reference letter. – List of company principals with credit backgrounds. – Description of the solicitation and obligee name. – Timeline for bid submission and any performance bond/insurance deadlines.
Pricing and underwriting basics (what determines the premium)
– Contractor’s financial strength, liquidity, and work history. – Size and complexity of the project. – Project geography and legal environment. – Contract duration and payment terms. – Amount of bond (penal sum). – Claims history of the principal (past bond claims raise rates).
Quick sample wording to require in an RFP (owners)
– “Bid security shall be provided in the form of a bid bond equal to 10% of the total bid amount, issued by a surety authorized to write surety bonds in [jurisdiction], naming [Obligee/legal entity exact name] as obligee. Original bond must accompany the bid.”
Limitations and assumptions
– This summary assumes typical U.S. practice; rules and common percentages vary internationally and by procurement type. – Premiums and underwriting policies change over time and across sureties. – A bid bond is not insurance for the owner’s full contract performance; it protects only against the bidder’s failure to enter the contract.
Educational disclaimer
This is general educational information, not individualized investment or legal advice. Consult a licensed surety bond broker, your attorney, or procurement specialist for decisions about specific solicitations or legal contracts.
Selected references
– Investopedia — Bid Bond: https://www.investopedia.com/terms/b/bid-bond.asp – U.S. Small Business Administration — Surety Bonds: https://www.sba.gov/funding-programs/contracting
– Surety Information Office — How Surety Bonds Work: https://www.suretyinfo.org
– Federal Acquisition Regulation (FAR) — Part 28: Bonds and Insurance: https://www.acquisition.gov/far/part-28
– Surety & Fidelity Association of America (SFAA): https://www.surety.org
– National Association of Surety Bond Producers (NASBP) — Resources: https://www.nasbp.org