Bid Bonds

A bid bond is a type of surety bond that guarantees a contractor will honor their bid, sign the contract if awarded, and provide the required performance and payment bonds. It protects the project owner (obligee) from financial loss if the winning bidder backs out, refuses to sign, or cannot secure the necessary bonds.

Bid bonds are commonly required in public construction projects (federal, state, and municipal) as well as large private contracts. They prove that a contractor is financially capable, qualified, and committed to completing the project.

A bid bond works as a financial guarantee that a contractor will honor the terms of their bid including signing the contract if awarded and providing the required performance and payment bonds. It gives the project owner confidence that the contractor is both serious about their bid and financially capable of completing the project.

The bond involves a three-party agreement:

• Principal: The contractor submitting the bid.
• Obligee: The project owner requesting the bond.
• Surety: The company issuing the bond and guaranteeing payment if a claim occurs.
   

The Process Step by Step

1. Bidding: Contractors submit bids for a project, usually including a bid bond as part of their bid package. Without a bond, bids are often rejected, especially on public projects.
2. Bond Issuance: The contractor applies for the bond through a surety company. The surety evaluates the contractor’s financial strength, creditworthiness, project history, and capacity before issuing the bond.
3. Awarding the Contract: The project owner reviews all bids and selects the winning contractor.
4. Default: If the winning contractor fails to sign the contract, withdraws their bid, or cannot provide the required performance and payment bonds, they are considered in default.
5. Claiming the Bond: The project owner can then file a claim. The surety compensates the owner — often paying the difference between the defaulting contractor’s bid and the next lowest accepted bid — up to the bond amount. The contractor is then responsible for reimbursing the surety.

A bid bond serves as a critical safeguard in the construction bidding process. Its primary purpose is to protect the project owner from financial loss if the lowest responsible bidder withdraws their bid, refuses to sign the contract, or fails to provide the required performance and payment bonds.

By guaranteeing that a contractor will honor their bid and proceed with the project under the agreed terms, bid bonds help ensure a fair, competitive, and reliable bidding environment for all parties involved.

For Project Owners

• Financial Security: A bid bond compensates the project owner if the winning contractor backs out, covering the difference in cost between the original bid and the next lowest qualified bid — up to the bond’s penal sum.
• Serious, Qualified Bids: Because contractors must go through a surety review to obtain a bond, only serious bidders who are financially stable and capable of completing the project participate.
• Pre-Qualification: The bond indicates that a surety company has evaluated and approved the contractor’s financial strength, experience, and ability to take on the project.
• Assured Performance: It guarantees the contractor will enter into the contract at their submitted bid price and secure the necessary performance and payment bonds to begin work.
   

For Contractors

• Cost-Effective Bid Security: A bid bond is typically far less expensive than providing a cash deposit or letter of credit, freeing up capital during the bidding process.
• Enhanced Credibility: Having a surety company back the bid demonstrates financial stability and reliability, helping contractors stand out to project owners and increasing their chances of winning bids.

Bid bonds are usually free or very low-cost, often provided by surety companies at no charge or for a small flat fee. Because they are short-term guarantees and part of the prequalification process, the main cost for contractors usually comes later, when they secure the required performance bond after winning the project. This is where the bulk of bonding costs are incurred.

Cost of the Performance Bond

Performance bond premiums generally range from 1% to 5% of the total contract value. For example, a $1,000,000 project might require a premium between $10,000 and $50,000. Contractors with strong credit, solid financials, and proven experience often qualify for rates on the lower end of this scale.

Factors That Affect the Bond Premium

• Credit Score: A higher credit score usually means lower bond premiums, since it signals reduced risk to the surety company.
• Financial Stability: Strong financial statements and working capital reserves make a contractor more attractive to sureties, often resulting in more favorable rates.
• Experience: Contractors with a solid track record of completing projects on time and within budget typically qualify for lower premiums.
• Project Complexity: Larger or riskier projects (such as those with long timelines or specialized requirements) may result in higher premiums due to the increased potential liability.
• Surety Company: Different surety providers have varying underwriting standards and fee structures, so obtaining multiple quotes can help contractors secure the best terms.

Getting a bid bond is a straightforward process, but it requires preparation and the right documentation. A bid bond is issued through a surety bond agency or a licensed insurance agent, who works with a surety company to evaluate your qualifications. Here’s how the process typically works:

Step 1: Understand the Project Requirements

Obtain the bid bond form and any bid security details directly from the project owner (the obligee). This ensures that the bond you apply for meets all specifications.

Step 2: Gather Financial Documents

Prepare your company’s financial statements, work-in-progress reports, project history, and personal credit information. These documents help demonstrate your financial stability and experience to the surety company.

Step 3: Contact a Surety Agent

Work with a licensed surety bond agent who specializes in construction bonds. At Lance Surety Bonds, we guide you through the entire application process, review your documents, and issue the bid bond you need to move forward with your project.

Step 4: Complete the Application

Fill out the bond application thoroughly, providing accurate details about your business, financial history, and the project you’re bidding on. Any missing or inaccurate information can delay approval.

Step 5: Underwriting Review

The surety company’s underwriter will carefully evaluate your financial strength, past project performance, and current workload to determine whether you qualify.

Step 6: Sign the Indemnity Agreement

If approved, you’ll be required to sign a general indemnity agreement (GIA). This standard contract ensures that you, and often your company’s owners personally, agree to reimburse the surety for any losses they may cover under the bond.

Step 7: Receive the Bond

Once the review is complete and the agreement is signed, the surety company issues your bid bond for the required amount. You can then submit it with your project bid to meet the owner’s requirements.

Have more questions? You can get in touch with our bonding experts at (877) 514-5146.

Bid bonds and performance bonds work as two stages of protection for project owners — before and after a contract is awarded.

• Bid Bond (Before Award): Submitted with a contractor’s bid, it guarantees they will sign the contract and provide the required bonds if selected. It protects the owner if the winning bidder backs out or fails to proceed.
• Performance Bond (After Award): Once the bid is accepted, the contractor must provide a performance bond, which guarantees they will complete the project according to the contract’s terms.
   

Because the same surety usually issues both bonds, contractors are thoroughly vetted upfront. Together, they ensure project owners are protected from bid submission to final completion.

Example 1: Default on a Public Infrastructure Project

A contractor bids $10 million on a New York bridge reconstruction project with a 10% bid bond. After being awarded the contract, the contractor fails to sign the agreement and cannot provide the required performance bond.

Outcome: The project owner claims $800,000 from the bid bond to cover the difference between the defaulting contractor’s bid and the next lowest bid. This demonstrates how bid bonds protect owners from financial losses when a winning contractor defaults.

Example 2: Failure to Meet Bond Requirements

For a new elementary school project in California, a contractor bids $25 million with a 5% bid bond. After winning, the contractor cannot secure the performance bond required to start the project.

Outcome: The school district claims the full $1.25 million bid bond to cover rebidding and delays, showing that bid bonds guarantee both commitment and the ability to meet contractual obligations.

Example 3: Withdrawal of Bid

A contractor bids $5 million with a $250,000 bid bond for a hospital wing expansion in Texas but withdraws the bid before contract signing.

Outcome: The owner claims the full bond amount to cover administrative costs and rebidding expenses. This example illustrates that bid bonds protect owners when a contractor withdraws after being awarded the project.

Example 4: Unsuccessful Bid

A contractor places a bid with a bid bond for a municipal road construction project but is not selected as the winning bidder.

Outcome: The bid bond is returned to the contractor. This shows that bid bonds do not penalize contractors for unsuccessful bids but ensure commitment in cases where they are successful.

How long does it take to get a bid bond?

For smaller projects, approval can take just 24–48 hours if you have the required documentation ready. Larger or more complex bids may require a longer underwriting process.

Does a bid bond guarantee project completion?

No, a bid bond only guarantees that the contractor will honor their bid, sign the contract, and secure the required performance and payment bonds if awarded the project. Project completion is guaranteed by a performance bond after the contract is awarded.

Can a bid bond be used for multiple projects?

No, a bid bond is specific to a single bid and project. Each bid requires its own bond unless a contractor uses a “continuous bid bond,” which covers multiple bids over a defined period, subject to the surety’s approval.

Can subcontractors be required to provide bid bonds?

Yes,  if required by the main contractor or project owner. Subcontractor bid bonds function similarly to contractor bid bonds, ensuring the subcontractor honors their bid and agreements.

Can I get a bid bond with bad credit?

Yes. Surety companies carefully evaluate your credit history, financial strength, and business experience before issuing a bid bond. Contractors with weaker credit may still qualify, but they could face higher premiums, need to provide collateral, or require a co-signer.