In Plain English
Quick Answer
A deposit or bond submitted with a bid that the owner can keep if the winning contractor backs out.
Definition
Definition
Bid security is a financial instrument required with a bid submission to protect the owner if the winning bidder fails to execute the contract. Common forms include bid bonds, certified checks, and letters of credit. The amount is typically 5–10% of the bid price and is returned to unsuccessful bidders after award.
Context
Why It Matters in Bidding
Bid security is the owner's insurance that the competitive process produces a contract rather than a wasted bid opening, since it gives the owner a recoverable sum if the apparent low bidder withdraws. The typical 5 to 10 percent amount is calibrated to roughly cover the gap between the low bid and the next acceptable bidder, capping the owner's re-procurement exposure. Requiring bid security also filters out under-capitalized or speculative bidders who cannot obtain surety backing.
Example
Example
The agency's instructions to bidders required bid security equal to 10 percent of the bid, so each contractor attached a bid bond for that amount to keep its proposal responsive.
See Also
Related Terms
FAQ
Questions Contractors Ask
How much is bid security usually worth?
It is commonly set at 5 to 10 percent of the total bid amount, with the exact figure stated in the instructions to bidders. The percentage is meant to approximate the owner's potential loss if it must award to the next-lowest bidder. Some public agencies fix a flat dollar amount or cap instead of a straight percentage.
Do losing bidders get their bid security back?
Yes. Bid security is returned to unsuccessful bidders, usually shortly after the award is made or once the winning contractor executes the contract and provides performance and payment bonds. If a bidder posted a certified check rather than a bond, the owner returns the check. Only the defaulting winner risks losing its security.
What is the difference between bid security and a bid bond?
Bid security is the broad requirement to post recoverable value with a bid, while a bid bond is one specific instrument that satisfies it. A bid bond is a surety-backed promise, whereas other acceptable forms of bid security include certified checks, cashier's checks, or letters of credit. So every bid bond is bid security, but not all bid security is a bond.
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