A bid bond is issued by the surety to the project owner to guarantee that the winning bidder will execute the contract under the terms of the bid. If the winning contractor fails to either execute the contract or perform as guaranteed, the cash deposit will be forfeited either fully or partially.
Bid bonds are guarantees from contractors that state that they will do the job they are bidding to do, if awarded the contract. Usually, the bid bond is required as part of the construction bid process to protect the interests of the person asking for bids in the case that the contractor chosen is not able to perform the work.
Usually, the amount for a bid bond will be 10% to 20% of the total project bid and must be submitted at the same time as the bid. In some very formal bid openings, the bond must be submitted separately from the bid, both in clearly marked envelopes. The bid must be for the correct amount stated, and in the proper form.
Bid bonds offer substantial protection to the owner of a project. If the contractor backtracks in his/her obligations, a new bid has to be submitted for the entire project, which results in delay. Similarly, if the contractor fails to sign a contract, the next lowest bidder may be selected. Bid bonds aim to insure the parties against such delays and resultant hardship.