A bid bond is a type of contract bond that serves as a security and a prequalification measure for a contractor’s bid during a bidding process.

Should the contractor be awarded the bid, the bond is there to guarantee that the contract will be executed at the bid price and under the conditions set forth in the bid. If the contract is not executed according to the bid, a claim against the bond can be made.

A bid bond further guarantees that if the contractor decides to withdraw from the bid after the bid has opened, a claim can be filed against the bond. There are some exceptions to this rule, but only if the contractor can prove that a mistake was made in their bid.

bid bonds work like all other surety bonds as agreements made between three parties. The obligee is the party requesting the bond (the project owner or the state), the principal is the party obtaining the bond (the contractor participating in the bid) and the surety bond company is the party issuing the bond, which is also responsible for its financial backing.

Most construction project bids require contractors or subcontractors to obtain a bid bond. Often, bids that are not backed by a bond are not accepted at all.

Bid bonds usually cost around $100 per contract.

Keep in mind that the cost of the bid is not the amount of the bid bond. The amount of the bid bond is the amount of coverage that the surety is ready to extend to the obligee. In other words, if a successful claim is made against your bid bond, the surety will cover costs only up to the full amount of the bid bond.

The full amount of a bid bond is determined in relation to the amount of the contract. A bid bond’s full amount usually does not exceed 5-10% of the total amount of the contract.

For example, if the contract you are bidding on is $200,000, the amount of your bid bond will be between $10,000-$20,000. In case of a claim against your bond, the surety will offer backing up $20,000, if that is the final amount of your bond.

Unlike the other contract bonds, bid bonds don’t cost much because of the detailed and extensive check that sureties perform on contractors prior to issuing the bond. When performing this check, personal credit score is among the most important factors that sureties take into account.