Bid security is a critical component of the construction bidding process that protects project owners from contractors who submit bids and then refuse to honor them. Whether you're new to bidding or an experienced contractor, understanding bid security requirements helps you submit compliant bids and avoid costly mistakes.
What Is Bid Security?
Bid security is a financial guarantee that a bidder will:
- Enter into the contract if selected as the winning bidder
- Provide required performance and payment bonds
- Honor their bid price for the specified period
If a contractor fails to meet these obligations after winning, the owner can claim the bid security to cover the cost difference of awarding to the next bidder.
Types of Bid Security
Bid Bonds
The most common form of bid security on construction projects:
- Issued by: Surety companies
- Typical amount: 5-10% of bid amount
- How it works: If the bidder defaults, the surety pays up to the bond amount
- Advantage: No cash outlay required
Bid Deposits (Certified Checks)
Cash-equivalent security:
- Form: Certified check, cashier's check, or bank draft
- Typical amount: 5-10% of bid amount
- How it works: Funds held by owner until award
- Consideration: Ties up cash during bid evaluation
Cash Deposits
Direct cash deposits:
- Less common than other forms
- Same function as certified checks
- Cash flow impact: Significant for large bids
Letters of Credit
Bank-issued guarantees:
- Irrevocable letter from a bank
- Less common in construction
- Higher bank requirements to obtain
Electronic Bid Bonds
Modern digital alternative:
- Faster issuance than traditional bonds
- Instant verification by owners
- Growing acceptance across agencies
Bid Bond Requirements by Project Type
Federal Projects
Federal construction contracts follow FAR (Federal Acquisition Regulation) requirements:
- Standard requirement: 20% of bid amount
- Threshold: Typically required on bids over $150,000
- Form: Bid bond preferred; certified check accepted
State and Local Public Projects
Requirements vary by jurisdiction:
- Common range: 5-10% of bid amount
- Thresholds: Often $25,000-$100,000
- Acceptable forms: Specified in solicitation
Private Projects
Owners set their own requirements:
- May or may not require bid security
- Terms are negotiable
- Forms accepted vary by owner preference
How Bid Bonds Work
The Three Parties
- Principal: The contractor (bidder)
- Obligee: The project owner
- Surety: The bond company
Obtaining a Bid Bond
Steps to get a bid bond:
- Apply to surety (often through your agent)
- Provide project information
- Surety evaluates your qualifications
- Bond is issued if approved
- Submit with bid
Bid Bond Costs
Bid bonds are often provided free or at minimal cost:
- Bundled pricing: Included with performance/payment bond quote
- Good customers: Often free from regular sureties
- Standalone: May cost 1-2% if purchased separately
What the Bond Guarantees
A bid bond guarantees the owner that you will:
- Accept the contract if awarded
- Execute the agreement within the required timeframe
- Provide required performance and payment bonds
- Begin work as required
When Bid Security Is Forfeited
Common Default Situations
Bid security may be claimed when a bidder:
- Refuses to sign the contract after award
- Fails to provide performance and payment bonds
- Withdraws bid during the hold period
- Cannot meet contract requirements discovered post-bid
What the Owner Recovers
The claim amount is typically:
- The difference between your bid and the next acceptable bid
- Up to the bond amount as the maximum
- Administrative costs may also be recovered
Example Scenario
- Your bid: $1,000,000
- Bid bond: 10% = $100,000
- Next lowest bid: $1,080,000
- If you default, owner claims: $80,000 (the difference)
If the difference exceeds the bond amount, you may be liable for the excess.
Bid Withdrawal Rules
Before Bid Opening
Generally, you can withdraw without penalty:
- Submit written withdrawal request
- Must be received before bid opening
- Follow agency-specific procedures
After Bid Opening
Withdrawal is more restricted:
- During bid hold period: May forfeit bid security
- After award: Almost always results in forfeiture
- Exceptions: Material errors (with proper documentation)
Bid Mistakes and Relief
Courts may grant relief for certain errors:
- Clerical errors: Mathematical mistakes, transposition
- Judgment errors: Generally NOT grounds for relief
- Requirements: Prompt notification, clear evidence, substantial loss
Bid Security Best Practices
Before Submitting
- Verify requirements in solicitation documents
- Confirm bond form is acceptable
- Check expiration dates on bonds
- Use correct project information
- Sign properly (authorized signatures)
Bond Form Considerations
- Use owner's form if one is provided
- Standard AIA or EJCDC forms widely accepted
- State-specific forms required in some jurisdictions
- Federal SF 24 for federal projects
Document Management
- Keep copies of all bid security submitted
- Track return of deposits/bonds
- Follow up if security isn't returned timely
- Maintain records for audit purposes
Getting Bid Bonds Approved
What Sureties Evaluate
For bid bond approval, sureties consider:
- Current workload: Backlog vs. capacity
- Financial strength: Working capital, credit
- Project fit: Experience with similar work
- Contract terms: Bonding requirements, conditions
Maintaining Bonding Relationships
Keep your surety informed:
- Provide regular financial updates
- Discuss large opportunities early
- Report project completions
- Communicate changes in your business
When Bonds Are Declined
If your surety won't provide a bid bond:
- Understand why: Financial, capacity, or project issues
- Address concerns: Provide additional information
- Consider alternatives: Cash deposit if allowed
- Evaluate the opportunity: Maybe it's too risky
Common Bid Security Mistakes
Administrative Errors
- Wrong bond amount: Must match or exceed requirement
- Incorrect obligee name: Must match exactly
- Missing signatures: All required parties must sign
- Expired bonds: Check validity period
- Wrong form: Use specified or acceptable form
Timing Issues
- Late submission: Bid security must arrive with bid
- Premature expiration: Bond must cover evaluation period
- Late bond renewal: Keep track of extension deadlines
Compliance Failures
- Incomplete information: Fill out all required fields
- Unauthorized signatures: Only proper representatives can sign
- Improper notarization: Follow notary requirements
- Power of attorney issues: Surety must have authority
Bid Security Return
When Security Is Returned
Typical return conditions:
- Non-awarded bidders: Usually within 30-60 days of award
- Successful bidder: After contract execution and bonds
- All bidders if project cancelled: Promptly returned
Following Up
If your bid security isn't returned:
- Contact the owner to verify status
- Provide documentation if requested
- Request written confirmation of return
- Check with your bank for certified checks
Special Situations
Joint Venture Bids
Bid security requirements:
- Bond names all JV members or the JV entity
- Proper authorization from all parties
- Surety may require indemnity from each member
Subcontractor Bid Security
GCs sometimes require sub bid security:
- Protect against sub withdrawal
- Smaller percentages typically required
- Usually bid deposits rather than bonds
Multiple Bids/Alternates
When submitting alternatives:
- Clarify which bid the security covers
- May need separate security for each
- Follow solicitation instructions exactly
Design-Build Proposals
Security requirements may differ:
- Often higher amounts due to design costs
- Longer hold periods for evaluation
- Multiple phases of security possible
State-Specific Considerations
Bid Bond Statutes
Many states have laws governing:
- Maximum bid security amounts
- Required return timelines
- Acceptable forms
- Release conditions
Researching Requirements
For each state you bid in:
- Review state procurement code
- Check agency-specific rules
- Verify local government requirements
- Consult with your surety agent
Conclusion
Bid security is a fundamental part of construction bidding that demonstrates your commitment to honoring your bid. Whether you use bid bonds, certified checks, or other acceptable forms, understanding how bid security works helps you:
- Submit compliant bids that won't be rejected
- Maintain strong surety relationships
- Avoid costly mistakes that forfeit your security
- Plan cash flow for deposit requirements
Before every bid, carefully review the bid security requirements in the solicitation. Verify you can meet them, obtain the proper security, and submit it correctly with your bid. This attention to detail is a basic but essential part of professional construction bidding.
ConstructionBids.ai shows bid security requirements upfront in our opportunity listings, helping you quickly identify projects that match your bonding capacity and prepare compliant submissions.
