What is a bid bond in construction?
A bid bond is a surety bond submitted with a bid that guarantees the bidder will sign the contract and furnish the required performance and payment bonds if it is awarded the job, or the surety pays the owner up to the bond amount.
A bid bond is a promise backed by a surety company. It tells the owner: if this contractor is low and gets the award, it will sign the contract and provide the performance bond and payment bond. If the contractor walks away, the surety pays the owner its damages, usually the difference between this bid and the next one, up to the penal sum of the bond. Bid bonds are standard on public work and common on larger private jobs.
How a bid bond works
Three parties are involved: the contractor (principal), the owner (obligee), and the surety. The contractor asks its surety, often through a bond agent, for a bid bond on a specific project. The surety checks that the job fits the contractor's bond capacity, then issues the bond for the amount the bid documents require.
On federal construction, the FAR says the bid guarantee must be at least 20 percent of the bid price, capped at $3 million. State and local owners set their own amounts in the invitation to bid. Read the instructions to bidders, because the percentage and the acceptable form (bond, certified check, cashier's check) vary.
| Bid price | 20 percent | Bid guarantee required |
|---|---|---|
| $1,800,000 | $360,000 | $360,000 |
| $9,500,000 | $1,900,000 | $1,900,000 |
| $22,000,000 | $4,400,000 | $3,000,000 (cap) |
What happens if the low bidder backs out
Say a contractor bids $1,800,000 on a federal project and discovers after opening that it left out the mechanical scope. If it refuses the award, the government can go to the next bidder at $1,910,000 and look to the bid guarantee for the $110,000 difference. Many owners have a separate process for honest clerical mistakes, but contractors should not count on it.
Also note the next step. Federal construction contracts over $150,000 require performance and payment bonds under the Miller Act, so a contractor that wins a bid has to be ready to deliver both bonds quickly.
Common bid bond mistakes
- Waiting until bid day to ask the surety. Most need several days, more for a job outside your usual size.
- Wrong amount or wrong owner name on the bond, which can make a bid nonresponsive.
- Submitting a copy when the owner requires an original with a raised seal or an approved electronic bond.
- Bidding a job your surety will not support with final bonds. A bid bond does not guarantee the final bonds will be issued at that size.
- Using a surety that is not acceptable to the owner. Federal work requires sureties on the Treasury list or other approved forms.
Related terms
Bid bonds sit with performance bonds, payment bonds, and the surety relationship. For public jobs, see how to bid public construction projects and how the Miller Act protects subcontractors. Smart Business Automator's public works tools keep bid dates, bond requests, and compliance paperwork together.
Frequently asked questions
How much does a bid bond cost?
Many sureties issue bid bonds at little or no charge for established clients, then charge a premium on the final performance and payment bonds. Ask your bond agent.
What percentage is a bid bond?
On federal construction it is at least 20 percent of the bid price, up to $3 million. State, local, and private owners set their own percentage in the bid documents.
Is a bid bond the same as a performance bond?
No. A bid bond covers the promise to sign the contract and furnish final bonds. A performance bond covers completing the work once the contract is signed.
Can I use a check instead of a bid bond?
Many public owners accept a certified or cashier's check as a bid guarantee. Read the instructions to bidders for the allowed forms.
