A bid bond is submitted with your bid and backs your promise to sign the contract at your bid price if you are selected. A performance bond is provided after award and backs your promise to complete the work as the contract says. Both come from a surety company, and both protect the agency, not you. Many public construction jobs also require a payment bond.
Three parties in every bond
A surety bond involves three parties. The principal is your company. The obligee is the agency that asks for the bond. The surety is the company that issues the bond and backs your promise.
If you fail to keep your promise, the obligee can make a claim against the bond. The surety may pay, but it will then expect your company to repay it. A bond works more like credit than like insurance.
The bid bond
A bid bond goes in with your bid. It secures your promise that, if the agency selects you, you will sign the contract at the price you bid and provide any required performance and payment bonds.
The amount is usually stated as a percentage of the bid. If the winning bidder walks away, the agency can claim against the bid bond to cover some of the cost of going to the next bidder. Some agencies accept a cashier's check or other bid security in place of a bond.
The performance bond
A performance bond is delivered after award, usually before the contract is signed or before work starts. It backs your promise to complete the work according to the contract.
The amount is often equal to the contract value. If you default, the surety may step in to finish the work, hire another contractor, or pay the agency up to the bond amount.
The payment bond
On public construction projects, a payment bond often comes with the performance bond. It secures payment to your subcontractors and suppliers. Because liens generally cannot be placed on public property, the payment bond gives them another way to get paid.
Side by side
Federal, state and local rules each set their own thresholds for when bonds are required.
- When: a bid bond goes in with the bid; a performance bond comes after award.
- What it backs: a bid bond backs signing the contract; a performance bond backs doing the work.
- Typical size: a bid bond is a smaller share of the bid; a performance bond is often the full contract value.
- Who requires it: both are common in public construction and less common in services and supplies.
Getting bonded before you need it
A surety will review your financial statements, work history, current backlog and credit before it issues bonds. That review takes time. Start the relationship before a bid with a short deadline lands on your desk.
Ask your surety for a bonding line, which is the size of a single job and the total of all jobs it is willing to back. Knowing that limit helps you decide which bids to pursue.
Read the bond forms in each solicitation closely. Many agencies require their own bond form, signed by both your company and the surety, with a power of attorney attached. Using the wrong form is a common reason bids are rejected.
Rules vary by agency and state; check the solicitation and your own advisers.
Common questions
Is a bond the same as insurance?
No. Insurance protects you. A bond protects the agency, and the surety expects you to repay any claim it pays.
Can I submit a check instead of a bid bond?
Some agencies allow a certified or cashier's check as bid security. The solicitation will say which forms it accepts.
What happens to my bid bond if I lose?
It is released. Bid security from unsuccessful bidders is generally returned or released after award.
Do service contracts need bonds?
Sometimes. Bonds are most common in construction, but some service and supply contracts ask for them too.