Bid bond is a legal agreement that ensures contractors fulfill their stated obligations on a project. This form of assurance provides both financial and legal recourse to the owner of the project. Bid bonds are usually submitted in conjunction with the project’s contract.

A bid bond guarantees that the contractor (otherwise known as Principal) will enter into a contract with the project owner (also called Obligee) if they are the low bidder on a project and are awarded a tender. Owner’s ask for bid bonds because they don’t want to sustain the cost of a re-tender if a bidder is low and awarded and subsequently backs out of the contract. What the bid bonds says is that if a bidder who is low and awarded backs out of a contract, the project owner has the right to claim on the bid bond for the value of the bid bond or the difference between the first and second bidder, whichever is lowest.

Sometimes project owners will also ask for another type of surety bond called a consent of surety (also know as agreement to bond). This document is provided with the bid bond at the tender stage and is a guarantee from the surety company that if the principal is low and awarded, the surety will provide the required construction bonds (i.e. performance bond and/or labor and material payment bond).

Who Needs a Bid Bond?

There are a variety of businesses that require bid bonds. The most common are construction companies. An example would be a general contractor building a hospital or mechanical contractor upgrading the HVAC systems in an arena.

Common Types of Contractors that Require Bid Bonds:

  • General Contractors
  • Electrical and Mechanical Contractors
  • Snow Removal and Landscape Contractors
  • Sewer & Watermain Contractors
  • Road Paving Contractors
  • Heavy Civil Contractors

 

The use of these bonds has increased significantly over the past few years as various provinces have looked at re-vamping their Construction Acts. Singapore was the first to finalize this process and has made bid bonds mandatory on all publicly funded construction projects over $500,000 in value. This has had a ripple effect in the private sector with a number of consultants writing the requirement for bid bonds into their tender specifications.