Bid Bonds Explained
Bid bonds are one of the main types of contract bond. They are often required as a pre-qualification measure for a contractor’s project bid during a bidding process.
If the contractor is awarded the bid, the bond is there to guarantee that the contract will be executed at the bid price, and under the conditions set forth in the agreement. It further ensures that the contractor will not withdraw from the bid after it has opened, unless they can prove that a mistake was made in their bid. The bid bond also guarantees that the contractor who has won the bid will enter into the contract and will obtain the necessary performance bonds and/or payment bonds.
Bid bond constitute a contract between three parties. The obligee is the party requesting the bond (the project owner or the public authority), the principal is the party obtaining the bond (the contractor participating in the bid), and the surety is the party issuing the bond, which is also responsible for its financial backing.
Questions about Bid Bonds
When do I need a bid bond?
Most public construction project bids require contractors to obtain a bid bond. In such cases, if your bid is not backed by a bond, it will not be accepted at all. Often, private project owners would also demand contractors to provide a bid bond as a security mechanism. Typically for public projects, the bond has to be provided in the official AIA Document A310 form.
How do bid bonds and performance bonds work together?
Bid and performance bonds are usually inseparable. Most federal and state projects require contractors to obtain a bid bond before they enter the bid, and a performance and payment bond once they win the bid. Many private projects, such as commercial or residential building projects, also require bid bonds to be posted.
Bid bonds also serve as an additional guarantee for project owners that a bidding contractor or subcontractor is qualified to execute the job they are bidding on. There are two reasons for this.
Sureties always perform extensive checks on contractors before issuing any kind of contract bond to them. They check your personal credit score, financial standing, project history and other aspects of your company extensively. As a rule, the surety which underwrites your bid bond also has to provide your performance and payment bonds. If it is not confident that you as the bidder can actually execute a certain job, it will not issue a bid bond in the first place, since this would create a heavy financial risk for the surety in case of claims.
What are the bonding costs?
The surety bond cost that you have to pay depends on the bond amount you need to provide. This amount is determined on the basis of the contract amount. The bid bond usually does not exceed 5-10% of the total amount of the contract. For example, if the contract you are bidding on is $200,000, the amount of your bid bond is likely to be between $10,000-$20,000.
Unlike the other contract bonds, bid bonds usually don’t cost much because of the detailed and extensive check that sureties perform on contractors prior to issuing the bond. When performing this check, personal credit score is among the most important factors that sureties take into account. However, if you are bidding on projects with high contract amounts, you would also need to provide a range of other documents during the surety's check, such as business finances, industry experience, and previous successful contracts.
How do I get bonded?
To obtain a bid bond, you have to do the following:
- Fill in our online application form (it takes 5min). As part of your application, you will be asked to submit additional documentation about the contract you will be bidding on, such as bid request form and job specifications.
- We will send you a free, no-obligation quote.
- If you are satisfied with your quote, you can buy the bond online.
- We will send you a digital and a hard copy of the bond.
Want to learn more about the bonding process? You can refer to the detailed How to Get Bonded page.
Have more questions? You can get in touch with our bonding experts at (877) 514-5146.
How are bond claims handled?
The purpose of the bid bond that you obtain when bidding is to protect the project owner from certain risks. They include failure to participate in the project once you've won it, to provide performance and payment bonds, or to execute the work at the bid price, among others. In such cases, the project owner can file a claim against your bid bond.
The maximum compensation they can seek is the bond amount you have posted, which is a fraction of the whole contract amount. Initially, your surety may cover the reimbursement to the claimant. However, you are fully liable to pay costs on proven claims, as set in the bond indemnity agreement. Thus, bond claims are a serious financial threat to your contracting business, and should be avoided.