Bid bond

A bid bond is a three-party surety bond. The contractor (the principal) promises the project owner (the obligee) that if its bid is accepted, it will sign the contract at the bid price and post the required performance bond and payment bond. If it walks away, the surety pays the owner the extra cost of going to the next bidder, up to the bond's penal sum.

The penal sum is a percentage of the bid set by the owner, commonly 5% to 10% on public work. Federal construction solicitations require a bid guarantee of at least 20% of the bid price, to a maximum of $3 million (FAR 28.101-2). Bid bonds are often issued at little or no charge when the surety expects to write the final bonds, and they usually come with a consent-of-surety letter promising that.

The bond screens out bidders who cannot be bonded, and the surety is vouching for you. It is not insurance. If the surety pays a claim, it recovers from the contractor and its owners under the general indemnity agreement signed at the outset. Bid only on jobs you are prepared to perform at your price, and talk to the surety before bidding something far outside your usual size, because bonding capacity limits apply at the bid stage too. The guide on bid, performance and payment bonds covers how the three work together.