Bid Security and Bid Bonds Explained for Construction Contractors

Bid security is a fundamental requirement in construction bidding. Understanding how bid bonds work, what they cost, and the conditions under which they can be forfeited helps contractors bid confidently and avoid costly mistakes.

What is Bid Security?

Bid security is a guarantee that a contractor will:

1. Honor their bid price if selected
2. Enter into a contract if awarded
3. Provide required performance and payment bonds
4. Begin work as specified

Bid security protects owners from contractors who submit artificially low bids with no intention of performing, or who withdraw after learning competitor prices.

Types of Bid Security

Bid Bonds

Most common form of bid security:

• Issued by surety companies
• Typically 5-20% of bid amount
• No cash outlay required
• Surety pays if contractor defaults

Cashier's Checks or Certified Checks

Cash equivalent security:

• Requires liquid funds
• Ties up working capital
• Returned after award (to non-winners)
• Some owners accept in lieu of bonds

Letters of Credit

Bank-guaranteed security:

• Issued by contractor's bank
• Bank pays on owner demand
• Requires credit facility
• Less common than bonds

Bid Deposits

Direct cash deposits:

• Cash held by owner
• Returned to unsuccessful bidders
• May earn interest
• Ties up capital

How Bid Bonds Work

The Three-Party Relationship

Bid bonds involve three parties:

• Principal: The contractor (you)
• Obligee: The project owner
• Surety: The bonding company

The Surety's Commitment

When you obtain a bid bond, the surety guarantees:

• You will accept the contract if awarded
• You will provide required performance/payment bonds
• If you fail to do either, the surety pays the owner

Bond Penal Sum

The bid bond has a dollar limit:

Percentage Bonds:

• "5% of bid amount" or "10% of bid amount"
• Calculated based on your submitted price

Fixed Amount Bonds:

• "Not to exceed $50,000"
• Set dollar limit regardless of bid amount

What Triggers Bond Forfeiture

The owner can make a claim when:

1. You're the apparent low bidder
2. You refuse to sign the contract
3. You can't provide required bonds
4. You withdraw after bid opening

Bid Bond Costs

Pricing Structure

Bid bonds are typically:

• Free from your surety (if you have a relationship)
• Part of your overall bonding program
• Included in annual bond costs
• Charged per bond by some sureties

Why Many Bonds Are "Free"

Sureties view bid bonds as:

• Commitment to write performance bond
• Extension of existing credit
• Relationship investment
• Loss leader for larger bonds

When Bid Bonds Cost Money

You may pay for bid bonds when:

• You don't have an ongoing surety relationship
• Project is outside normal program
• One-time bond need
• Specialty or unusual project

Typical cost: $50-$500 per bond when charged.

Obtaining Bid Bonds

Through Your Surety

If you have a bonding relationship:

1. Contact your bond producer (agent)
2. Provide project information
3. Surety reviews against your credit
4. Bond issued (often same day)

Required Information

Sureties typically need:

• Project name and owner
• Bid amount (estimated if not finalized)
• Contract completion time
• Bond requirements (performance/payment amounts)
• Project description

Turnaround Time

With established relationships:

• Same-day bonds common
• Hours for standard projects
• May need more time for large/unusual projects

Building Surety Relationships

To establish bonding capacity:

• Work with construction-focused insurance agent
• Provide financial statements
• Share company background
• Demonstrate experience
• Maintain strong balance sheet

Bid Bond Forfeiture

When Forfeiture Applies

Owners can claim against bid bonds when:

Failure to Execute Contract:

• You're awarded the project
• You refuse to sign
• No valid legal excuse

Failure to Provide Bonds:

• Contract requires bonds
• You can't obtain them
• Surety won't write them

Bid Withdrawal:

• You withdraw after opening
• No clerical error defense
• Owner relied on your bid

Forfeiture Amount

What the owner receives depends on:

Actual Damages Approach: Owner recovers lesser of:

• Difference between your bid and next bidder
• Bond penal sum

Example:

• Your bid: $1,000,000
• Next bidder: $1,050,000
• Bond amount: $100,000 (10%)
• Owner's claim: $50,000 (actual difference)

Full Penal Sum Approach: Some jurisdictions allow:

• Full bond amount as liquidated damages
• Regardless of actual cost difference
• Check local law

What Happens After Forfeiture

When a bid bond is called:

1. Surety investigates the claim
2. Surety may pay owner
3. Surety seeks reimbursement from you
4. Your bonding capacity is affected
5. Future bonding becomes difficult

Avoiding Forfeiture

Protect yourself by:

• Only bidding projects you can perform
• Verifying bonding capacity before bidding
• Careful estimating to avoid errors
• Understanding contract terms
• Having surety review large projects

Bid Withdrawal and Clerical Errors

When You Can Withdraw

Limited circumstances allow withdrawal:

Clerical/Mathematical Errors:

• Calculation mistakes (provable)
• Transposition errors
• Omitted scope items
• Must be evident from bid documents

Requirements for Relief:

• Prompt notification to owner
• Clear documentation of error
• Error must be significant
• Request before award

How to Handle Errors

If you discover an error:

1. Notify owner immediately in writing
2. Document the error thoroughly
3. Provide worksheets showing mistake
4. Request bid withdrawal
5. Be prepared to forfeit if denied

Legal Protection

Know your rights:

• Many states have bid mistake statutes
• Courts may grant relief for obvious errors
• Prompt action is essential
• Legal counsel recommended

Bid Bonds and Subcontractors

Subcontractor Bid Bonds

Some projects require sub bonds:

• Listed subcontractors must bond
• Protects GC and owner
• Adds cost to sub bids

GC Considerations

When subs are bonded:

• More reliable pricing
• Reduced sub default risk
• Higher sub prices
• Administrative burden

Best Practices for Bid Security

Before Bidding

• Verify bonding capacity for project
• Understand bond requirements in bid docs
• Confirm surety will write performance bond
• Review contract for problematic terms

Preparing Your Bid

• Double-check all calculations
• Have second person review math
• Document estimate thoroughly
• Allow time before deadline

After Bid Submission

• Monitor for errors immediately
• Be available for clarifications
• Prepare for award notification
• Have contract review process ready

If Selected for Award

• Review contract promptly
• Execute within required timeframe
• Obtain performance/payment bonds
• Begin mobilization planning

Common Questions

Q: What if my bonding company won't write the performance bond?

A: This triggers bid bond forfeiture. Always verify surety commitment before bidding.

Q: Can I withdraw if I made a mistake?

A: Possibly, but you must act immediately and document the error clearly. Relief isn't guaranteed.

Q: Do I get my bid bond back?

A: There's nothing physical to return. The obligation simply expires after award to another contractor.

Q: How long is a bid bond valid?

A: Typically 60-120 days, as specified in the bond or bid documents. Can be extended if needed.

Q: What happens if the owner cancels the project?

A: Your bid bond obligation expires. No forfeiture occurs.

Conclusion

Bid bonds are a routine part of construction bidding that protect owners and ensure contractor commitment. Understanding how they work helps you bid confidently and avoid the serious consequences of forfeiture.

Build a strong relationship with a construction-focused surety and bond producer. Maintain the financial strength to support your bonding needs. And always verify your bonding capacity before committing to bid on projects.

The key to success with bid security is preparation. Know your limits, verify your surety's commitment, and estimate carefully. With proper planning, bid bonds become a routine administrative step rather than a source of risk.