Bid bonds are guarantees from contractors that state they will do the job they are bidding to do, if they are awarded the contract. Typically, the bid bond is required as part of the construction bid process. It protects the person asking for bids in the case that the contractor chosen is not able to perform the work. While there is often very little financial gain to the owner of a project, it does encourage contractors to make sure their bids are valid.
Bid bonds are also called surety bonds. While the two may be used interchangeably to a degree, it is important to understand that there is a difference between them. A surety bond simply guarantees that an action will be done in the stated manner. If not, a monetary penalty is awarded. A bid bond is specific to a construction project. In other words, all bid bonds are surety bonds, but not all surety bonds are bid bonds.
The typical amount for a bid bond will be 10% to 20% of the total project bid. This must be submitted at the same time as the bid. In some cases, at very formal bid openings, the bond must be submitted separately from the bid, both in clearly marked envelopes. If there is no separate bid bond, then the bid probably will not be opened at all. It will be considered invalid, because the contractor failed to follow proper procedures. Further, once the bid bond is opened, it must be for the correct amount stated, and in the proper form, or the bid will likely be rejected without even looking at it.
The protection offered to the owner of a project by bid bonds is quite substantial. Though the monetary value may not be that great, especially compared to the overall cost of the construction project, having a contractor submit an invalid bid can be a great expense. The entire project may have to be re-bid if the contractor fails to live up to his or her obligations. In some cases, such as if the contractor fails to sign a contract, the next lowest bidder may be chosen.
Regardless of whether the entire project needs to be re-bid, or whether the next lowest bidder can be picked, it will still cause some delays. In the case where the bid process is restarted, those delays can be months. In most cases, especially if an owner was depending on the project to be done in a certain time frame, that could cause a hardship. Bid bonds seek to ensure that this hardship does not happen.