Bid Bond

A bid bond is a surety bond that a contractor submits with a construction bid to guarantee they will enter into the contract at the price quoted if awarded the work. It protects the project owner from the financial loss that occurs when a winning bidder refuses to sign the contract or cannot secure the required performance and payment bonds. If the contractor walks away after winning, the bond covers the difference in cost between the winning bid and the next lowest bid.

Think of it as a contractor's deposit: you can walk away, but you forfeit the deposit to cover the cost of re-bidding the project.

The Miller Act Requires Bid Bonds on Federal Projects

Under the Miller Act (40 U.S.C. Sections 270a-270f), all federal construction contracts over $150,000 require surety bonds. When a performance bond is required, a bid bond is required alongside it. State and local governments typically mirror this requirement for publicly funded projects.

The requirement creates a quality filter. Because a surety will only issue a bid bond to contractors who qualify for performance bonds, requiring bid bonds at the bidding stage effectively limits competition to contractors with the financial capacity to complete the work.

How the Three Parties Work Together

A bid bond involves three parties. The principal is the contractor buying the bond. The obligee is the project owner or government agency protected by the bond. The surety is the bonding company that issues the guarantee.

The contractor's obligation under the bond runs in two directions. If awarded the project, the contractor must sign the contract and provide the required performance and payment bonds. If the contractor fails to do either, the surety steps in to cover the owner's resulting losses.

The Penal Sum Is Typically 5% to 10% of the Bid

The penal sum, or bond amount, usually equals 5% to 10% of the total bid value. On a $500,000 project, the required bid bond is typically $25,000 to $50,000. Federal projects often require 20%. The claim amount is limited to the difference between the winning bid and the next lowest bid, not the full penal sum, unless the two are close in value.

Most bid bonds cost a small flat fee, often under $100, rather than a premium tied to the bond amount. The real cost of obtaining bonding capacity is in meeting the surety's underwriting requirements, which examine the contractor's financial strength, track record, and management quality.

Bid Bonds Lead to Performance and Payment Bonds

A bid bond is only the first in a series. Once awarded, the contractor must provide a performance bond guaranteeing they will complete the project and a payment bond guaranteeing subcontractors and material suppliers will be paid. The three bonds together are the standard package for public construction in the United States. Failing to secure any of the three after winning a bid triggers the bid bond claim and may bar the contractor from future public work.

Sources:
https://www.nasbp.org/about/about-surety/
https://www.procore.com/library/bid-bonds
https://www.jwsuretybonds.com/contractor-bonds/bid-bond
https://learn.aiacontracts.com/articles/6260866-surety-bonds-what-owners-should-know/
https://fcainsurance.com/bid-bonds/