Bid Bond

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A bid bond is used during the bidding process when bidding on construction contracts to show that the contractor has the financial means to complete the project within the resources that he has bid on. When a project owner, whether it is federal or private, opens a project for bidding by contractors, it would be too expensive and labor intensive for the project owner to investigate each bidder to ensure that each bidder is financially secure enough to complete the project within the bid that they placed. As such, by relying on a bid bond company instead, they know that if, in fact, the contractor is not able to complete the contractual obligations as agreed upon, the project owner is assured that if the bidder defaults on the project, the project owner will not be left with a project left undone and no way to resolve the issue.

That is where the bid bond company will step in and help resolve matters. Should the project owner have to decide to cancel the contract with the lowest bidder due to issues with non-performance and then go with the second lowest bidder, the bid bond company would then cover the costs between the two bids and any related costs. The bid bond company may also sue the contractor that they had originally bonded to recoup those costs, depending on the initial contract between the bonding company and the contractor. The bid bond company usually, however, does credit checks and financial reviews of companies that they consider for bonding before they agree to bond to limit the risks of such actions.