Glossary
Bid bond
A bid bond is a surety's guarantee that a contractor will sign the contract at its bid price and provide the required bonds if it is awarded the job.
By IntelCost Team ·
A bid bond is a guarantee from a surety company, submitted with a bid, that the contractor will sign the contract at its bid price and provide the required performance and payment bonds if it wins. If the contractor backs out, the owner can recover its loss from the bond.
The three parties
- Principal: the contractor submitting the bid.
- Obligee: the owner who asked for the bond.
- Surety: the bonding company that guarantees the principal's promise.
The amount is a guarantee, not a cost
The bid documents say whether a bid bond is required, the form to use and the amount, usually as a percentage of the bid price. On private jobs and many state and local jobs, 5 to 10 percent of the bid is common. Federal contracts that call for a bid guarantee require at least 20 percent of the bid price, capped at $3 million. The project's bid documents set the actual requirement, so check the instructions to bidders: a missing or wrong bid bond can get a bid thrown out.
That percentage is a penal sum: the most the surety could have to pay the owner if you walk away. It is not a fee and it is not added to your price. The bid bond itself usually costs little or nothing. What you actually pay a surety for is the bond premium on the performance and payment bonds, once the job is awarded.
If the low bidder refuses to sign or cannot provide the bonds, the surety pays the owner. Depending on the bond form, that is either the full bond amount or the owner's actual loss, often the difference between the defaulting bid and the next one, up to the bond amount. The surety then looks to the contractor to repay it.
Some owners accept a certified check or cashier's check instead of a bond. That ties up cash until the award, which is why most contractors use a bond.
Example
Say your bid is $2,400,000 and the bid documents call for a 5 percent bid bond (example values):
- Bond amount (the penal sum): $2,400,000 x 0.05 = $120,000. This is a limit, not a charge.
- The next lowest bid is $2,460,000
- If you walk away, the owner's extra cost is $2,460,000 - $2,400,000 = $60,000
- Under a form that pays actual loss, the surety owes $60,000, within the $120,000 limit, and then looks to you to repay it
If you sign the contract as promised, nobody pays anything under the bid bond.
Bid bond vs performance and payment bonds
| Bond | Guarantees | When | What you pay |
|---|---|---|---|
| Bid bond | You will sign the contract and provide the other bonds | With the bid | Usually little or nothing |
| Performance bond | You will finish the work under the contract | At contract signing | A premium on the contract value |
| Payment bond | You will pay your subs, workers and suppliers | At contract signing | A premium on the contract value |
On federal construction contracts over $150,000, the Miller Act requires performance and payment bonds, and most states have similar laws for public work. The contract states which bonds are needed and in what amounts.
In the bid
The bid bond amount never goes into the price. The "Bond" line in a bid summary is the premium on the performance and payment bonds, figured on the contract value at your surety's rates and added near the end of the bid after markup. In IntelCost's estimating, the bid summary adds bond after tax, overhead and profit, ending in the bid total. The guide on how to build a bid summary works a premium through a full example.