Bid security is a fundamental requirement for most construction projects, ensuring contractors are serious about their proposals and will honor their bids if selected. This guide covers everything contractors need to know about bid security requirements.
What Is Bid Security?
Bid security is a financial guarantee submitted with a construction bid that protects the project owner if the winning bidder fails to execute the contract or provide required performance and payment bonds.
Purpose of Bid Security
| Purpose | Protection Provided | |---------|---------------------| | Commitment verification | Ensures bidders are serious | | Financial protection | Covers re-bidding costs | | Contract enforcement | Encourages contract execution | | Market stability | Discourages bid shopping |
Common Bid Security Amounts
Most projects require bid security equal to:
- 5% of bid amount (most common)
- 10% of bid amount (some federal projects)
- Fixed dollar amount (smaller projects)
- Sliding scale based on project size
Types of Bid Security
1. Bid Bonds
The most common form of bid security for construction projects.
How Bid Bonds Work:
- Issued by a surety company
- Three-party agreement (principal, obligee, surety)
- Surety guarantees contractor performance
- Premium typically 1-3% of bond amount
Advantages:
- No cash outlay required
- Preserves working capital
- Demonstrates bonding capacity
- Industry standard acceptance
Requirements for Obtaining:
- Strong financials
- Good credit history
- Relevant experience
- Bonding relationship
2. Cashier's Checks
A bank-issued check guaranteed by the issuing institution.
How Cashier's Checks Work:
- Funds withdrawn from contractor's account
- Bank guarantees payment
- Returned after bid award (if not selected)
Advantages:
- No surety relationship needed
- Immediate availability
- Universally accepted
Disadvantages:
- Ties up working capital
- Limits bidding capacity
- Opportunity cost of funds
3. Certified Checks
A personal or business check certified by the bank.
Differences from Cashier's Checks:
- Drawn on contractor's account
- Bank certifies funds available
- Less common for large projects
4. Letters of Credit
A bank guarantee to pay on demand.
Types:
- Irrevocable - Cannot be cancelled
- Standby - Paid only on default
Common Uses:
- Larger projects
- International work
- Alternative to bonds
5. Cash Deposits
Direct cash payment to the owner.
Considerations:
- Maximum capital impact
- Simple and straightforward
- Rare for large projects
- Common for small local work
Federal Bid Security Requirements
Federal Acquisition Regulation (FAR) Requirements
Projects over $150,000 typically require:
- Bid guarantee of 20% of bid price (or $3 million maximum)
- Performance bond (100% of contract value)
- Payment bond (100% of contract value)
Acceptable Forms Under FAR
- Bid bonds (Standard Form 24)
- Irrevocable letters of credit
- Treasury securities
- Certified checks
- Cashier's checks
Small Business Considerations
SBA bonding programs help small businesses:
- SBA Surety Bond Guarantee Program
- Guarantees up to 90% of bond
- Enables access to bonding
- Reduces surety risk
State and Local Requirements
Common State Variations
| State Type | Typical Requirement | |------------|---------------------| | Most states | 5-10% bid security | | Some states | Specific bond forms required | | Local agencies | May accept alternatives |
Municipal Project Requirements
- Often mirror state requirements
- May have specific local forms
- Sometimes accept cash alternatives
- Verify with each agency
Private Project Bid Security
When Required
Private owners may require bid security for:
- Large commercial projects
- Industrial construction
- Institutional work
- High-risk projects
Flexibility in Forms
Private owners often accept:
- Traditional bid bonds
- Letters of credit
- Cash deposits
- Corporate guarantees
Bid Security Process
Before Bidding
-
Verify Requirements
- Read bid documents carefully
- Note exact amount required
- Confirm acceptable forms
- Check submission requirements
-
Secure Bond/Security
- Contact surety agent
- Provide project information
- Obtain bond or alternative
- Verify bond form compliance
-
Prepare Submission
- Complete bond forms properly
- Attach power of attorney
- Include all required signatures
- Meet deadline requirements
Common Submission Errors
| Error | Consequence | |-------|-------------| | Wrong amount | Bid rejection | | Missing signatures | Non-responsive bid | | Expired bond | Disqualification | | Wrong form | May be rejected | | Late submission | Automatic rejection |
After Bid Opening
If Selected:
- Bid security held until contract execution
- Execute contract within specified time
- Provide performance/payment bonds
- Bid security released or applied
If Not Selected:
- Bid security typically returned
- Return timeline varies (30-90 days)
- Some retain until contract executed
- Follow up if not returned promptly
Bid Security Forfeiture
When Forfeiture Occurs
Bid security may be forfeited if contractor:
- Withdraws bid during validity period
- Fails to execute contract when awarded
- Cannot provide required bonds
- Refuses to honor bid price
- Provides false information
Forfeiture Amounts
| Situation | Typical Forfeiture | |-----------|-------------------| | Full forfeiture | Entire bid security | | Actual damages | Difference to next bidder | | Lesser of two | Most common approach |
Avoiding Forfeiture
- Ensure bonding capacity before bidding
- Verify all costs before submitting
- Don't bid beyond capabilities
- Communicate issues promptly
- Maintain bid validity awareness
Bonding Capacity Considerations
Understanding Your Capacity
Bonding capacity determines how much work you can pursue:
Factors Affecting Capacity:
- Working capital
- Net worth
- Credit history
- Experience and track record
- Current work in progress
Calculating Available Capacity
Total Bonding Program: $10,000,000
Current Bonded Work: $6,000,000
Work in Progress: $4,000,000
Available Capacity: $4,000,000
Maximizing Capacity
- Maintain strong financials
- Build surety relationships
- Complete projects successfully
- Manage work in progress
- Communicate with surety regularly
Cost of Bid Security
Bid Bond Premiums
| Contract Size | Typical Premium | |---------------|-----------------| | Under $500K | $50-$200 flat fee | | $500K-$2M | 1-2% of bond | | Over $2M | 0.5-1.5% of bond |
Reducing Costs
- Bundle with performance bonds
- Maintain strong surety relationships
- Build track record
- Improve financial position
- Shop competitive rates
Best Practices
For Contractors
- Pre-qualify bonding before pursuing projects
- Maintain surety relationships through regular communication
- Track bid security returns and status
- Verify requirements for each project
- Submit properly completed forms
For Bid Managers
- Create checklists for bid security requirements
- Establish timelines for bond procurement
- Maintain surety contacts for quick turnaround
- Track outstanding bid security
- Follow up on unreturned security
Troubleshooting Common Issues
Bond Not Received in Time
Solutions:
- Contact surety immediately
- Request expedited processing
- Have backup security ready
- Communicate with owner if needed
Insufficient Bonding Capacity
Options:
- Request capacity increase
- Partner with another contractor
- Pursue smaller projects first
- Improve financial position
Bond Form Rejected
Actions:
- Verify specific requirements
- Obtain correct form from surety
- Request owner clarification
- Resubmit promptly
Related Articles
- Understanding Bid Bonds: Construction Guide
- Performance Bond Requirements: Construction Guide
- Pre-Qualification Requirements for Government Contracts
Frequently Asked Questions
What happens to my bid bond if I'm not selected? Bid bonds are typically returned or released within 30-90 days after contract award to another contractor.
Can I withdraw my bid after submission? Generally, bids cannot be withdrawn during the validity period without forfeiting bid security, unless there's a clerical error that can be documented.
How long does it take to get a bid bond? With an established surety relationship, bid bonds can often be issued within 24-48 hours. New relationships may take longer.
Is bid security refundable if the project is cancelled? Yes, if the project is cancelled before award, bid security is returned to all bidders.
Can I use the same bid bond for multiple projects? No, each project requires its own bid bond with the specific project details and amounts.
