What is a Bid Bond?

A Bid Bond is a type of Construction Bond that provides a guarantee that the winning bidder will take up the contract as per the terms at which they bid. This bond ensures compensation to the bond owner if the bidder fails to begin a project. A Bid Bond is obtained through a surety agency, and it guarantees that a contractor is financially stable and has necessary resources to take a project.

There are three parties to a Bid Bond: the principal, the obligee and the surety. The principal is the contractor purchasing the bond, while the obligee is the project owner protected by the bond. The surety is the company providing the bond.

Cost of a Bid Bond

The cost of the Bid Bond, which is the premium paid by the contractor to the surety depends on various factors such as cost of the project (bid cost), location of the project, the owner and financial history of the contractor.

Working of the Bid Bond

Bid Bonds help to prevent contractors from submitting inappropriate low bids to win a contract. During the bidding process, various contractors estimate what will be the cost to complete the job, and they submit their price to the owner in the form of a bid. The contractor who wins the bid is given the project.

A Bid Bond serves as a guarantee that the contractor who wins the bid will honor the terms of the bid after the contract is signed. If the contractor fails to honor the terms, for example: if he raises the price of the bid after the contract is signed, in this case the contract will be broken and the owner will have to find another contractor, most probably the next lowest bid. In this scenario, the Bid Bond compensates the obligee with the cost difference between the first contractor and the next lowest bid.

In some cases, the surety also sues the contractor to recover these costs, depending on the terms of the bond.