Bid Bond/Tender Bond

A bid bond is used when a contractor (the principal) is bidding on a tendered contract.

It prequalifies the principal and provides security to the owner or general contractor (obligee) that the principal will, in fact, enter into a contract if it is awarded.

A bid bond guarantees that the obligee will be paid the difference between the principal's tender price and the next closest tender price in the event that the principal is awarded the contract but fails to enter into the contract with the obligee. The bid bond penalty is generally limited to ten percent of the bidder's tender price. Contractors like bid bonds because they are not expensive and do not tie up their cash or bank credit lines during the bidding process. Owners and general contractors like bid bonds because they establish that the bidding contractor or supplier has the support of a surety company and is qualified to undertake the project.