Bid Bonds

A Beginner’s Guide to Bid Bonds: Things to Know 

The construction industry is a lucrative one. The current workforce in the US construction industry is at 7.21 million. It shows no signs of slowing down.  With all these construction projects going on, contractors are needed. Contractors are the ones who will be doing the actual work.  When bidding on a construction project, having all of your ducks in a row is crucial. A critical part of the process is securing a bid bonds. 

This document guarantees that if you are the winning bidder, you will be able to perform the contract. The following article will discuss what is a bid bond is and what you need to know before securing one for your next project.

What are Bid Bonds?

Bid bonds are a type of surety bond often required by government agencies and large organizations when awarding contracts. The purpose of a bid bond is to protect the entity awarding the contract if the winning bidder fails to follow through on their bid. 

If the winning bidder fails to meet their obligations, the entity can make a claim on the bond for the difference between the winning bid and the next lowest responsible bid. 

These bonds are part of a larger surety bond package, typically including performance bonds and payment bonds. 

How do Bid Bonds Work?

When a large organization looks to award a contract, they will often put the job out to bid. Companies interested in being awarded the contract submit their best offer or bid for the work. The organization then selects the company with the lowest and best bid.

Sometimes, a company will submit a low bid to get their foot in the door, only to raise the price once they’ve been awarded the contract. To protect against this, organizations will often require a bid bond.

A bond guarantees that you will enter into a binding agreement and perform the work as outlined in your bid if you are awarded the contract. If you don’t, the organization can file a claim against the bond and be compensated for any damages.

Typically, bid bonds are issued for between five and ten percent of the contract’s total value. So, if you’re bidding on a $100,000 job, your bid bond would likely be for $5000-$10000.

It’s important to note that you, the contractor, are responsible for paying the premium for the bond. It is generally a tiny percentage of the total bond amount and is due when the bond is issued.

Benefits of Using Bonds 

Now that you know what is a bid bond, here are five reasons to use these agreements.

1) They Add An Extra Layer Of Security

Bid bonds show that the contractor is financially capable of handling the project. It makes the owner feel more comfortable awarding the job to them.

If the contractor defaults on their obligations, the surety company will cover some or all of the damages. A bid bond responds when a contractor fails to enter into a contract for a project they have tendered and been awarded.

2) The Agreement Protects The Owner From Contractor Fraud 

The surety company will investigate the contractor before issuing the bond. They make sure that the business is legitimate and has the necessary licenses. 

The bond issuer will also check if the contractor has any lawsuits or unpaid debts. It gives the owner peace of mind knowing they’ve chosen a reputable contractor.

3) It’s A Sign Of A Sincere Contractor

When contractors are willing to get bonded, they’re serious about their business and the projects they take on. 

It is because the process of getting bonded can be time-consuming and expensive. 

Therefore, if a contractor has made an effort to get bonded, they’re likely committed to their work and will complete the project as agreed upon. 

Additionally, bonding companies will only work with contractors that they deem to be low-risk. The contractor has an excellent financial standing and a history of completing projects on time and under budget. 

4) You Can Avoid Financial Loss

If you are the successful bidder on a project, the bid bond will guarantee that you will enter into a contract and perform the work according to the terms of your bid.

If you default on your obligations, the penal sum of the bid bond will be used to cover any damages or financial losses incurred by the owner. In other words, bid bonds protect the owner from financial loss if the contractor defaults.

It’s important to note that bid bonds are a form of suretyship, a three-party agreement. The three parties involved in a suretyship agreement are:

  • The principal (the party who is seeking the bond) 
  • The obligee (One who requires the bond) 
  • The surety (the person or company that provides the bond) 


If you wish to obtain a bid bond, you must go through a surety company. It will analyze your financial history and credit score and help you further.