A Bid Bond is issued to facilitate the bidding process by a contractor for a project, supplies or service contract.The Bid Bond guarantees the procuring entity that the winning bidder will satisfy the requirements of the contract once it is awarded. The Bid Bond therefore assures that the successful bidder will execute the contract and provide the required performance guarantees.
A Bid Bond is often an amount not more than 2% of the contract value and is issued to the procuring entity to secure the contractors bidding process.
A Bid Bond guarantees that the “obligee” will be paid the difference between the principal's tender price and the next closest tender price. This action is only triggered should the principal be awarded the contract but fails to enter into the contract, as agreed, with the obligee. The bid bond penalty is generally ten percent of the bidder's tender price.
Contractors prefer the use of Bid Bonds because they are a less expensive option and they do not tie up cash or bank credit lines during the bidding process.Owners and general contractors also use Bid Bonds because they establish and confirm that the bidding contractor or supplier is qualified to undertake the project.