What Is a Bid Bond? Your Guide To Understanding The Basics

  • 3 min read

When bidding on contracts for projects, you may be required to post a bid bond. A bid bond is a security deposit that ensures you will perform if you are the winning bidder. Without it, the project owner or contracting authority may fear you won’t follow through with your proposal and they will not be able to recoup their investment. If you are interested in bidding on publicly-funded projects, there is a good chance that posting a bid bond will be part of the process. Understanding what a bid bond is and how it works can help you determine whether it’s worth investing in one for your next opportunity.

What Is a Bid Bond?

A bid bond is a type of performance bond that is posted as a guarantee during bidding. Bid bonds are required for most government projects, and they are also often required by other entities, such as utilities when contracting for services. A bid bond is a security deposit that is typically 10 percent of the total amount of a contract. Investors who provide a bid bond are responsible for guaranteeing that if they win a contract and then default on it, they will pay the full amount of the project to the contracting authority. Bid bonds are meant to protect the contracting authority from losing money if the winning bidder does not perform as promised on the project. The money posted as a bid bond can be any amount that is agreed upon by the bidder and the contracting authority.

How Does a Bid Bond Work?

When you are the winning bidder on a contract, you will likely have to post a bid bond to guarantee that you will perform. If you do not perform, the contracting authority will be able to recover the amount of the bid bond from the surety bond company that issued it. If you are the contracting authority, you will have the option of requesting that the surety bond company enforce the bond if the winning bidder does not perform as promised. The surety bond company may either withhold payment from the winning bidder or pay the contracting authority directly to fulfill the terms of the bid bond.

Why Are Bid Bonds Used When Bidding on Contracts?

Bid bonds help ensure that contractors will perform if they win a contract and become an approved vendor for the contracting authority. They are a good way for contracting authorities to protect against loss in the event that a contractor does not perform and does not have the assets to cover any damages. Contracting authorities may require bid bonds for the following reasons: 

  • To ensure that contractors have enough money to pay for the project. 
  • To ensure that contractors have enough net worth to cover any performance issues.
  • To help contractors demonstrate that they are financially stable. 
  • To make sure that contractors have insurance coverage in case they cause damage on the project site.

Conclusion

A bid bond is a type of performance bond that is posted as a guarantee during bidding. Bid bonds are required for most government projects, and they are also often required by other entities, such as utilities when contracting for services. Bid bonds help ensure that contractors will perform if they win a contract and become an approved vendor for the contracting authority.

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