A bid bond is a financial guarantee provided by a contractor as part of a project bid, ensuring that if awarded the contract, they will enter into an agreement and provide the required performance and payment bonds. If the contractor fails to do so, the bond compensates the project owner.
Why Bid Bonds Are Required
They protect project owners from bidders who submit offers but fail to follow through. Bid bonds also deter contractors from submitting unrealistic low bids that they cannot fulfill.
How Bid Bonds Work
- The contractor obtains a bid bond from a surety company
- If the contractor wins the bid but refuses the contract, the surety compensates the owner
- The contractor must then provide performance and payment bonds before starting work
Related Terms: Performance Bond, Surety Bond, Construction Bidding Process, Bid Security
FAQs
Are bid bonds required for all construction projects?
A: They are common for public projects and large private contracts but may not be required for small-scale jobs.
What is the typical value of a bid bond?
A: Usually 5-10% of the total bid amount.