A bid bond is a guarantee, usually issued by a surety or insurance company, that protects the project owner if a contractor wins a tender but then refuses to sign the contract or arrange the performance and payment bonds it promised. If that happens, the bond compensates the owner, typically covering the cost of re-tendering or awarding the job to the next bidder. Bid bonds are common on US public contracts and international tenders; in the UK the closer equivalent is usually called a tender bond, and it is used far less often outside large or international projects.
Worked example
A contractor bids $2,000,000 for a public highway contract in the US and is required to post a bid bond. The surety sets the bond at 10% of the bid, $200,000, so if the contractor walks away after winning, the surety covers the owner's loss up to that amount, generally the difference between the winning bid and the next lowest one if the job has to be re-awarded. The contractor does not pay $200,000 up front; the surety charges a premium, a smaller percentage of the bond amount, based on the contractor's credit and track record.
Bid bonds in the cost report
A bid bond itself rarely appears as a line item on a project cost report, since it is a pre-contract guarantee rather than a project cost. Where a premium is charged, it is typically absorbed into the contractor's overhead rather than tracked against one job. What does matter for cost control is the chain it sets off: winning a bid with a bond attached commits the contractor to arranging performance and payment bonds next, and those do carry costs worth tracking through the life of the project.
Related terms
Performance Bond, Bonding Capacity.
FAQs
Are bid bonds required for all construction projects?
No. They are common on public contracts and large international tenders, particularly in the US, but many private and smaller projects do not require one.
What percentage of the bid is a bid bond usually set at?
On US private projects it is typically 5 to 10% of the bid amount. Federal contracts require a bid guarantee of at least 20% of the bid price, capped at $3 million, under the Federal Acquisition Regulation.
Planyard's bidding software helps contractors put tender submissions together and compare Subcontractor quotes before they go in, though the bond itself is still arranged separately through a surety or broker.