Bid security is a standard requirement for public construction projects and many private ones. Understanding your options, costs, and compliance requirements helps you bid confidently without last-minute scrambling.
What Is Bid Security
Definition
Bid security is a financial guarantee that the bidder will honor their bid price and enter into a contract if awarded. If the winning bidder withdraws or fails to execute the contract, the owner can claim the bid security as damages.
Purpose
For Owners
- Ensures bidders are serious
- Protects against withdrawal costs
- Covers re-bidding expenses
- Demonstrates financial capacity
For Contractors
- Shows commitment and capability
- Levels playing field
- Weeds out unqualified competitors
- Standard industry practice
Types of Bid Security
Bid Bonds
Definition: A three-party agreement between contractor (principal), owner (obligee), and surety company guaranteeing the bid.
Characteristics
- Most common form for public work
- Typically 5-10% of bid amount
- Issued by surety companies
- Premium costs vary
Advantages
- No cash outlay
- Professional vetting included
- Industry standard
- Transferable to payment/performance bonds
Cashier's Checks
Definition: Bank-guaranteed check payable to the owner
Characteristics
- Immediate cash equivalent
- Full face value at risk
- Returned after award/rejection
- Simple to obtain
Advantages
- Quick to obtain
- No bond underwriting
- Useful for smaller bids
- No premium costs
Disadvantages
- Ties up cash
- Full amount at risk
- Less professional appearance
- No prequalification benefit
Certified Checks
Definition: Personal or business check certified by the bank
Characteristics
- Bank verifies funds available
- Funds held by bank
- Similar to cashier's check
- May have expiration
Usage: Less common than cashier's checks; check bid documents for acceptability
Letters of Credit
Definition: Bank commitment to pay on demand
Characteristics
- Irrevocable during bid period
- Bank obligation to pay
- May require specific format
- Higher fees than bonds
Usage: Rare for bid security; more common for performance guarantees
Cash Deposits
Definition: Physical cash or wire transfer
Characteristics
- Rarely accepted for large bids
- Administrative burden
- Usually for small projects
- Full amount at risk
Usage: Very rare; typically only for minor projects
Bid Bond Details
Standard Requirements
Amount
- Typically 5% of bid amount
- May be 10% for some owners
- Fixed amounts less common
- Check bid documents carefully
Format
- Owner-specific forms common
- Standard AIA forms acceptable
- Surety company forms may work
- Review requirements before ordering
Obtaining Bid Bonds
Process
- Contact your surety or broker
- Provide project information
- Confirm bonding capacity
- Receive bond document
- Submit with bid
Timeline
- Existing relationship: same day
- New client: 1-2 weeks for approval
- Large projects: additional review time
- Rush requests: possible with good relationship
Bid Bond Costs
Premium Structure
- Often included in P&P bond premium
- May be free with contract bond purchase
- Standalone: $50-500 typical
- Varies by surety and relationship
No-Award Situations
- Bond returned unused
- Premium may still apply
- No claim against bond
- Part of doing business
Compliance Requirements
Submission Timing
With Bid
- Most common requirement
- Must be sealed with bid
- Original documents usually required
- Copies may be rejected
Pre-Qualification
- Some owners require bond letter upfront
- Proves bonding capacity
- May reduce bid day paperwork
- Increasingly common
Document Requirements
Original vs. Copy
- Original signatures typically required
- Power of Attorney attached
- Seal or certification
- Check specific requirements
Format Compliance
- Use owner's form if provided
- Match exact legal names
- Correct project references
- Accurate bid amount
Common Errors
Fatal Mistakes
- Wrong project name/number
- Incorrect bid amount
- Missing signatures
- Expired Power of Attorney
- Wrong owner name
Correctable Issues
- Minor name variations
- Mathematical errors
- Missing dates
- Some procedural issues
Bid Security Claims
When Claims Occur
Typical Triggers
- Winner refuses to sign contract
- Winner can't provide P&P bonds
- Material misrepresentation discovered
- Failure to meet deadlines
Process
- Owner provides notice
- Cure period (if allowed)
- Formal claim
- Surety investigation
- Payment or dispute
Claim Amounts
Typical Damages
- Difference to next bidder
- Re-bidding costs
- Administrative expenses
- Capped at bond amount
Example
- Low bid: $1,000,000
- Second bid: $1,050,000
- Bid security: 5% ($50,000)
- Claim: $50,000 (difference)
Avoiding Claims
Best Practices
- Only bid what you can perform
- Confirm bonding before bidding
- Double-check numbers
- Honor your commitments
- Communicate problems early
Bonding Capacity
Understanding Capacity
What It Means
- Maximum bonding surety will provide
- Based on financial review
- Includes all current bonds
- Single project and aggregate limits
Typical Ratios
- 10-20x working capital for aggregate
- Single job limits vary
- Depends on company history
- Relationships matter
Increasing Capacity
Financial Improvements
- Increase working capital
- Improve balance sheet ratios
- Strong banking relationships
- Consistent profitability
Operational Improvements
- Complete projects successfully
- Maintain good references
- Clean claim history
- Strong management team
Emergency Capacity
When You Need More
- Large opportunity appears
- Multiple wins simultaneously
- Growth period
Options
- Co-surety arrangements
- Subcontractor bonds
- Joint venture partners
- Owner negotiation
Alternative Security
When Bonds Aren't Available
Situations
- New company
- Poor financials
- Bad claim history
- Specialty work
Options
- Cashier's checks
- Letters of credit
- Joint ventures
- Private work focus
Private Work Differences
Common Approaches
- Bid security waived
- Corporate guarantee
- Parent company guarantee
- Escrow arrangements
Negotiation Possible
- Private owners more flexible
- Discuss alternatives upfront
- Relationship-based decisions
- Risk allocation discussion
Best Practices
Preparation
Before Bid Season
- Confirm bonding capacity annually
- Update financial statements
- Maintain surety relationship
- Know your limits
Per Project
- Verify capacity for specific bid
- Order bond early
- Review document requirements
- Confirm Power of Attorney
Documentation
File Management
- Keep copies of all bonds
- Track expiration dates
- Document returns
- Maintain surety correspondence
Audit Trail
- Original bond with bid
- Copy in project file
- Return acknowledgment
- Claim documentation (if any)
Conclusion
Bid security is a routine requirement that occasionally trips up unprepared contractors. Understanding your options, maintaining bonding capacity, and following submission requirements carefully prevents unnecessary bid rejections.
Most established contractors use bid bonds as the default, with the premium cost factored into overhead. Newer or smaller contractors may use cashier's checks for flexibility while building surety relationships.
The key is preparation—know your capacity, understand the requirements, and leave time for any issues. Bid security should never be the reason you miss an opportunity.
ConstructionBids.ai displays bid security requirements for each opportunity, helping you identify bonding needs before committing to bid.
