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Bid Bond basics

An increasingly common practice when submitting a bid for a contracting job is the use of a Bid Bond. A Bid Bond is a financially backed guarantee which supports the position that if you are awarded the job, your construction company will honor the bid that you submitted. It protects your ability to perform the work as specified and it makes your offer potentially more attractive to the deciding body.

What is a Bid Bond vs Performance Bond?

A Bid Bond is typically submitted with your initial bid for a construction job. In essence, it gives your proposal the effect of saying, "If you choose our construction company, we can do the job for this amount and we have a Bid Bond to prove it." Whereas a Performance Bond guarantees that once you have already been selected and agree to do the work, you will perform as specified in the contract. The Performance Bond is a guarantee that you will not only complete the contract as agreed upon, but also that the work will be performed properly, in accordance with that agreement. A Bid Bond is submitted before the contract has been awarded or signed.

What is the cost of a Bid Bond?

Because Bid Bonds are guarantees being offered before binding agreements are entered into, they are relatively inexpensive. They often run in the $100-$350 range, depending on the market.

In order to secure a Bid Bond, the surety company will conduct an investigation into the business that is applying for one. The factors that will be considered include the bid cost, the location of the project, and the financial history of the contractor. Smaller projects will cost less and larger projects will cost more–typically a percentage of the total estimated project cost.

A Bid Bond should include information such as:

  • the name of the contractor placing the bid
  • the name of the business or organization requesting the bid
  • a description of the construction project, including its specific location
  • the name of the surety company guaranteeing the bid
  • the bid amount that is guaranteed
  • the number of days in which the final contract must be signed if the bid is accepted
  • which organizations will be parties to the Bid Bond
  • any additionally relevant terms as set forth by the party requesting the bid

Do you get a Bid Bond back?

The Bid Bond is returned to the surety company once the contractor has been selected. If your business is selected, the organization will likely return the Bid Bond in exchange for the Performance Bond.

However, if you withdraw your bid after it has been selected, raise your cost, or otherwise fail to honor the terms of the bid you made, then the surety contract will be considered breached, and you will likely have to pay a penalty to the surety company or the designated agency of the business that you submitted your bid to. The Bid Bond compensates the organization for the difference in cost between your initial bid and the next lowest bid.

Is a Bid Bond a financial guarantee?

A Bid Bond is a financial backing that ensures a construction company will enter into a contract for the amount contained within the bid if chosen. A Bid Bond is granted when an insurance broker gives their endorsement that your construction business is capable of completing a job at your bid price.

Bid Bonds let clients know that when they accept a bid, they'll get what was proposed. The bonds also help contractors assure the project owner that their bid is the best option. Rocket Lawyer offers this Free Bid Bond document to use once you are ready to enter into a Bid Bond and you want to define the terms and conditions of the agreement.

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Sample Bid Bond

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