What Is a Bid Bond and When Do You Need One?
If you bid on public construction work long enough, you will run into a bid bond requirement. Many contractors know the term without being fully clear on what a bid bond actually does or what it costs them if something goes wrong.
Before you price
What a bid bond guarantees
A bid bond is a guarantee to the owner that if you win the bid, you will sign the contract and provide any required performance and payment bonds.
If you win and walk away, whether because of a mistake in your number, your bonding capacity changed, or simply a change of heart, the owner can make a claim on the bid bond for the difference between your bid and the next lowest bid, up to the bond amount.
The bid bond does not guarantee that you will complete the work. That is the performance bond's job. The bid bond only covers the gap between your price and the next bidder if you default on signing.
How much bid bonds cost
Most bid bonds cost nothing out of pocket. Sureties issue bid bonds as a courtesy to contractors they have a bonding relationship with. If your surety has approved you for a bonding program, they will typically issue bid bonds for free or for a nominal flat fee.
What bid bonds do cost is time and a bonding relationship. If you do not have a surety, getting one means providing financial statements, a work-in-progress schedule, and a personal indemnity agreement. That process takes weeks, not days.
The typical bid bond amount is 5 to 10 percent of the bid amount. If the bond is called, the surety pays the owner and then seeks reimbursement from you under the indemnity agreement.
When owners require them
Federal and most state public contracts require bid bonds by law above certain dollar thresholds. The federal threshold under the Miller Act is $150,000. State thresholds vary.
Private owners can require bid bonds at their discretion. Some do, especially on large projects or when they have been burned by bidders withdrawing in the past.
If a bid bond is required, it will be listed in the Instructions to Bidders section of the RFP, usually alongside the performance and payment bond requirements. Missing a bid bond requirement means your bid may be rejected as non-responsive.
What happens if you win and cannot perform
If you win a bid, sign the contract, and then fail to obtain performance and payment bonds as required, or fail to mobilize, you are in performance bond territory, not bid bond territory.
The scenario where the bid bond matters is simpler: you submit a bid, you win, and you decide not to sign the contract. The owner re-bids or goes to the next lowest bidder. The bid bond covers the owner's additional cost.
Bid mistakes are a gray area. In some states, bidders can withdraw a bid after opening if they can show a clerical error made without negligence. The rules vary by jurisdiction and contract language. If you discover a material mistake right after opening, get an attorney involved before making any decision about the bid.
Getting your bonding capacity in order before bid day
If you want to bid bonded work and do not have a surety relationship, start that conversation well before you have a bid to submit. The underwriting process takes time and requires financial documentation.
Sureties look at your working capital, net worth, backlog, and experience. A construction-focused accountant who prepares a reviewed or audited financial statement makes the process go faster.
Once you have a bonding program, maintain it. Missing financial statement deadlines or taking on more work than your capacity allows can get your bonding pulled mid-season.