A bid bond is a may provide from a bank or bonding company that a contractor will enter into a construction contract if their bid is accepted
When a contractor bids on a construction project, the project owner often requires a bid bond — a promise backed by a bank or bonding company that says: if we win this bid, we will sign the contract and post the required performance bond. The bond protects the owner from the cost of re-bidding the project if the winning contractor walks away.
The bid bond itself is not money. It is a written may provide, usually for 5 to 10 percent of the total bid amount. If the contractor refuses the contract after winning, the bonding company pays the owner the difference between that contractor's bid and the next-lowest bid — up to the bond amount. The contractor then owes the bonding company that payout.
Bid bonds are standard in public construction projects and common in large private ones. They are issued by surety companies (bonding firms), not by banks themselves, though a bank may help arrange one or require you to post collateral to secure it.
Key Takeaways
- A bid bond guarantees that a contractor will sign the contract if their bid is accepted; it is not a payment, but a promise backed by a bonding company.
- The bond amount is typically 5 to 10 percent of the bid and covers the owner's cost to re-bid if the contractor refuses the job.
- Public construction projects almost always require bid bonds; private owners use them less often but may still demand one for large jobs.
- If you refuse a contract after your bid is accepted, the bonding company pays the owner and you owe that amount back to the bonding company.
- Bid bonds are issued by surety companies, not banks, though you may need to pledge collateral or pay a fee to obtain one.
How a bid bond protects the project owner
A project owner posts a bid on the open market and receives multiple bids from contractors. The owner chooses the lowest responsible bid — but what if that contractor changes their mind after winning? Without a bid bond, the owner would have to re-bid the entire project, wasting time and money.
The bid bond shifts that risk to the contractor. If the winning contractor refuses to sign the contract, the bonding company pays the owner the difference between the winning bid and the next-lowest bid (or the bond amount, whichever is smaller). This payment compensates the owner for the cost of going to the second-lowest bidder or re-bidding the work.
For public projects funded by tax dollars, bid bonds are often required by law. Government agencies use them to ensure contractors take their bids seriously and do not submit low bids they cannot or will not perform.
Who requires bid bonds and when
Public construction projects — roads, schools, municipal buildings, water systems — almost always require bid bonds. The requirement is usually written into the bid documents and the contract terms.
Private owners use bid bonds less often but may require them for large projects, especially commercial or industrial work worth hundreds of thousands of dollars or more. A private owner might skip the bond for a small renovation but demand one for a new building.
Bid bonds are also common in other industries that use competitive bidding: government supply contracts, equipment procurement, and service contracts. The principle is the same — the bond ensures the winning bidder will perform.
How to obtain a bid bond
You request a bid bond from a surety company — a bonding firm licensed to issue guarantees. You do not get one from a bank, though your bank may refer you to a surety or require you to pledge assets as collateral.
To get a bid bond, you will need to provide the surety with the bid documents (the project scope and contract terms), proof of your contractor's license, financial statements, and sometimes references from past clients or lenders. The surety assesses your ability to perform the work and your financial stability.
The surety charges a fee, usually 1 to 3 percent of the bid amount, depending on your credit, experience, and the project risk. You pay this fee upfront, whether or not your bid is accepted. Some sureties also require you to pledge collateral — equipment, real estate, or a cash deposit — to back the bond.
What happens if you refuse the contract after winning
If your bid is accepted and you refuse to sign the contract, the project owner files a claim against your bid bond. The surety investigates the claim and, if valid, pays the owner up to the bond amount.
You then owe the surety the full amount they paid out. This debt does not disappear — it is a legal obligation, and the surety may pursue collection, place a lien on your assets, or report the default to credit agencies. Future bonding becomes harder and more expensive.
Refusing a contract after bidding is rare because contractors know the consequences. Most bid bonds are never claimed because winning bidders honor their bids and sign the contract.
Bid bonds versus performance bonds
A bid bond guarantees you will sign the contract. A performance bond guarantees you will complete the work according to the contract terms. They are separate bonds, issued at different times.
You post the bid bond before the contract is signed (or as part of the bid submission). If your bid is accepted, you then post a performance bond, usually for 100 percent of the contract value, before work begins. The performance bond protects the owner if you fail to finish the job, do poor work, or abandon the project.
Some projects also require a payment bond, which guarantees you will pay your subcontractors and suppliers. All three bonds are common on public projects; private projects may use only performance and payment bonds.
Cost and collateral requirements
Bid bond fees range from 1 to 3 percent of the bid amount, depending on the surety's assessment of your risk. A $100,000 bid might cost $1,000 to $3,000 to bond. You pay this fee whether your bid wins or loses.
Sureties also evaluate your personal credit, business credit, and financial statements. If your credit is weak or your business is new, the surety may require collateral — a cash deposit, a lien on equipment, or a pledge of real estate — to secure the bond. This collateral is held by the surety and released only after the bond period expires (usually 30 to 90 days after the contract is awarded).
Contractors with strong credit and a history of successful projects pay lower fees and may not need collateral. Those with poor credit or limited experience pay higher fees and are more likely to face collateral demands.
Frequently Asked Questions
Can I get a bid bond if I have bad credit?
Yes, but you will pay a higher fee and likely need to post collateral. Sureties assess credit as one factor among many — they also look at your business experience, past projects, and financial statements. A surety may require a cash deposit or lien on equipment to secure the bond if your credit score is low.
What if I submit a bid but do not get the contract?
The bid bond expires after the bid period ends (usually 30 to 90 days). If you do not win, the bond is released and you owe nothing further. You paid the fee upfront, but that is the only cost. The surety does not pay out because there is no claim.
Do I need a bid bond for private construction work?
Not always. Private owners decide whether to require bonds. Small renovations and repairs rarely need them. Large commercial or industrial projects often do. Check the bid documents — if a bond is required, it will be stated there.
Who issues bid bonds — banks or bonding companies?
Surety companies (bonding firms) issue bid bonds, not banks. A bank may help you arrange one or require collateral, but the may provide itself comes from the surety. You contact a surety directly or through an insurance broker.
What is the difference between a bid bond and a performance bond?
A bid bond guarantees you will sign the contract if your bid is accepted. A performance bond guarantees you will complete the work. Bid bonds are posted before the contract is signed; performance bonds are posted after. Both are common on public projects.