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A “Bid Security”, also known as a Bid Bond, protects the project owner during the tender stage. Contractors submit this bond with their bid to show commitment. It guarantees that the contractor will sign the contract if selected. The bond also ensures the contractor provides the required performance security after award.

Purpose and Function of a Bid Security

A Bid Security discourages careless or speculative bidding. It assures the owner that only serious bidders join the process. If the winning bidder refuses to sign, the bond compensates the owner for losses. This includes covering the difference between the winning bid and the next lowest bid. The bond strengthens trust and promotes fair competition in procurement.

Provisions

The Bid Bond specifies the penal sum, usually expressed as a percentage of the bid value. It names the contractor as principal, the project owner as obligee, and a bank or surety as guarantor. The bond states the validity period, often matching the bid’s acceptance window. It sets out conditions that trigger liability, such as refusal to sign or failure to provide guarantees. The obligee can then claim payment without a lengthy dispute.

Practical Considerations

Contractors must arrange Bid Bonds through reliable banks or surety companies. They should confirm that the penal sum and duration meet the tender rules. Owners must check that the bond form complies with local law or procurement standards. Contractors should avoid submitting bids without bonds when required, as rejection is immediate.

After the contract award, the contractor replaces the Bid Bond with a Performance Bond, which guarantees the proper execution of the contract and protects the owner against default or non-performance. This bond assures that the contractor will complete the work in accordance with the agreed specifications, schedule, and price.

If the contractor fails to perform, the Performance Bond enables the owner to claim compensation or arrange for completion through another party. In some cases, the contractor may also be required to furnish additional securities, such as an Advance Payment Guarantee to secure any upfront funds provided, or a Retention Bond to cover post-completion defects. Once the Performance Bond is accepted and the contract is formally signed, the Bid Bond is released, marking the transition from tender security to performance assurance.

Check the following templates:

• Bid Bond – 1
• Bid Bond – 2
• Reimbursement of Bond Deductions Form
• Convertible Bond Purchase Agreement
• An Ultimate Guide to the Different Guarantees

Reference:

Surety and Fidelity Association of America (SFAA)