A bid bond provides financial protection to an owner if a bidder is awarded a contract but fails to sign the contract or fails to provide the required performance and payment bonds. The bid bond also helps screen out unqualified bidders, as a surety company will not issue a bid bond on behalf of a contractor that it believes cannot perform the contract obligation. Before issuing a bid bond, the surety company prequalifies the contractor, by thoroughly investigating the contractor and determining that the contractor has the ability to carry out the work under the construction contract. It is like a surety seal of approval.
The surety’s specific obligation under the bond is set forth in the bond itself. The surety is usually obligated to pay the owner the cost of having to repeat the bid process or the difference between the lowest bid and the second lowest bid, if the awarded bidder is unable or unwilling to perform. The surety’s liability is generally limited to the face amount, or penal sum, of the bond, which is in the range of 5 to 20 percent of the contract price.