If you’ve ever rented an apartment, you probably had to put down a security deposit with your rental application. The security deposit serves many functions, but one is to show that you’re serious about renting the property and have the financial means to do so. A bid bond is similar to a security deposit, but is meant to ensure that a contractor will enter a job contract instead of a rental agreement.
Bid bonds are used during projects that require contractors to secure a job contract in a bid-based selection, such as in construction jobs. In a bid-based selection, contractors estimate how much the project will cost in the form of a bid. Each contractor or “principal” then purchases a bid bond to show that they’re serious about their bid price.
If you’re a contractor, buying a bid bond is a guarantee that you’re able to perform the terms of the contract. You supply a certain amount of money up front to prove that you won’t run into cash flow issues down the line. Buying a bid bond also signifies that you promise to purchase any surety bonds specified in the contract, such as performance bonds or payment bonds that are meant to ensure your competence. If you don’t comply with the terms of the contract, then your bid bond can be used to cover any additional costs in selecting and hiring a new contractor (generally 10-20 percent of your bid price).
You can purchase a bid bond from a bond-issuing company (generally a bank or insurance company), who will perform credit and financial reviews before issuing you the bond. Construction companies really need to purchase bonds to be competitive in the industry, since all federal projects require bid bonds and many private companies have imitated this practice.
Learn more about bid bonds or surety bonds in the links below. For more in-depth help, we can also help you find a lawyer.