- In order to understand what a bid bond is, one must know what a surety is. In the construction bidding process, particularly in federal or government projects but also in any project with large budgets, the surety (a bank or insurance company) establishes a guarantee that an obligation (an agreed upon contract) made by placing a bid will be met. Bid bonds, also called a bid guaranty or bid surety, are the portion of the bidding process that assures the owner of the project that the winning bid can be honored. When working with very large sums of money, a bid bond makes the process work more smoothly. Without the bid bond the owner does not know who the bidders are and if they are financially solvent.
- Each bidder is required to "put up" a small percentage of the total contract amount, usually between one and three percent, in order to bid. When a cap on a project is not in place the total can be an agreed upon amount. The Surety (probably a bank in this case) holds this money until the contract is awarded. At this time the money is refunded to the bid losers. Once the bid is awarded, the winner then puts up a performance bond to assure the owner the contract will be completed as outlined. Usually the performance bond is ten percent of the overall budget amount. Typically the bid bond money is rolled into the performance bond and handled by the same surety. If the winning bidder does not follow through on their obligation, the surety pays the owner of the project the difference between the winning bid and the next highest bid amount, not to exceed the total of the bid bond. This is referred to as liquidated damages. The bank, or surety, keeps the winning bidders bid bond to pay for the damages.
- Bonds are legal documents binding the signers to a particular portion of the bidding process. Bid bonds, performance bonds, and payment bonds are all part of the bidding and awarding process as long as the owner chooses this process. Ultimately, the owner of the project is responsible for paying all funds for the project but because the owner is not handling the details of hiring the laborers and purchasing the materials, the owner wants assurance that the money he or she hands to the contractors will be handled appropriately.
