A bid bond is often required on projects funded by tax dollars, including many federal, state, and municipal jobs. It is intended to confirm the bidder’s sincerity and financial commitment during the bidding process.
In practical terms, a bid bond guarantees one of the following outcomes:
- If the bidder is awarded the contract, they will sign it, provide the required Performance and Payment (P&P) Bond, and begin the work.
- If they do not proceed, they may be responsible for the difference between their bid and the next higher qualified proposal.
This protects taxpayers by helping ensure the work can still be completed at the low-bid price.
Why Sureties Take Bid Bonds Seriously
Bid bonds are part of contract surety, but they function as financial guarantee bonds. Because of that, sureties underwrite them carefully.
A common misunderstanding is: “It is only a bid bond.” In reality, sureties generally treat the bid bond as part of the path to the upcoming Performance and Payment bond. If P&P underwriting is unresolved, the surety has little reason to issue the bid bond.
Important Bid Bond Points to Know
- Protecting confidentiality: Underwriters usually do not need the exact bid number at bid-bond request time. A rounded figure is often acceptable.
- Surety approval signal: Award based on a bid bond typically indicates the obligee has accepted that surety, which helps with the upcoming P&P bond process.
- Large spread between bids: If a bid is more than 10% below the next bidder, a written explanation may be required before P&P issuance to confirm no math errors and sufficient profit margin.
- Capped bid bonds: Some bid bonds are capped at the approved estimate. If the bid increases at the last minute, the contractor may be unable to submit above the approved amount. Using a sufficient request amount helps avoid this issue.
- Bid date postponements: If the obligee moves the bid date, check whether the original bond is still acceptable or if a reissued bond with the new date is required.
- Capacity impact while pending: When a bid remains undecided, the contract amount is often treated as “in use” against available bonding capacity. Report “not low” results quickly so capacity is released.
- Termination timing: Bid bonds are commonly considered terminated when the P&P bond is issued, or after 90 days, depending on the obligee terms.
- Low bidder security hold: The low three bidders’ security is often held until the low bidder signs and bonds the contract.
One Last Word of Caution
Some obligees allow a check instead of a bid bond. However, if the bidder is awarded the work but cannot produce the required P&P bond, that check may be forfeited.
When possible, a bid bond is usually the safer approach.
Need help with bid bonds or construction bonding? Call 623-261-8233 and our team can walk you through it.