Bid Bond

A bid bond is an undertaking, issued by a bank or a surety company on behalf of a company submitting a tender, that pays the party running the tender a set amount if the bidder withdraws its bid during the validity period, or wins the award but refuses to sign the contract or deliver the required performance security. Outside North America it is usually called a tender guarantee or bid security.

The bid bond is the first instrument in the life of a contract and is replaced, if the bidder wins, by a performance bond and often an advance payment guarantee. It is common in public procurement, construction, engineering and large equipment supply. Bank-issued bid guarantees usually follow the ICC Uniform Rules for Demand Guarantees (URDG 758); surety-issued bonds follow the bond wording and local suretyship law.

Imagine selling a house through sealed offers. You choose the best offer and take the house off the market, then the winning buyer changes its mind. You have lost time and may have to accept a lower offer from someone else. A bid bond is like asking each bidder to put down a holding deposit with a trusted third party, which you keep if the winner walks away.

The difference is that nobody actually hands over cash. Each bidder's bank or insurer simply promises to pay if that bidder backs out. Bidders that lose the tender get their promises back, and the winner swaps its bid bond for a bigger promise covering the work itself. The bond keeps casual or reckless bidders out of serious tenders.

Tender documents state the form, amount and validity of the bid security. A typical wording entitles the beneficiary (the employer, buyer or procuring agency) to claim if the bidder:

• Withdraws or alters its bid after the closing date but before the bid validity period ends.
• Refuses to sign the contract after being notified of the award on the terms of its bid.
• Fails to furnish the performance security, such as a performance guarantee or standby letter of credit, within the time allowed.

The amount is usually a fixed sum or a small percentage of the bid price, chosen so that it roughly covers the cost of re-tendering or of accepting the next-best offer. International tenders often fall in the low single-digit percentages. United States federal construction contracts are a notable exception: under the Federal Acquisition Regulation (FAR), the bid guarantee must be at least 20% of the bid price, capped at $3 million. Validity normally matches the bid validity period plus a short margin, and the instrument expires or is returned once the contract is signed or the tender is cancelled.

Two different industries issue bid security, and the instruments behave differently when called.

• Bank tender guarantee. Issued as an independent demand guarantee, it is payable against a compliant written demand. The bank does not decide whether the bidder really withdrew. It counts the guarantee against the bidder's credit facility, often taking collateral or cash margin, which uses up working capital.
• Surety bid bond. Issued under a surety bond programme, it is usually conditional: the obligee must show the bidder defaulted, and the surety may pay only the difference between the defaulting bid and the next acceptable bid, up to the bond amount. Surety underwriting focuses on the contractor's capacity, so a surety's willingness to issue a bid bond is also read as a signal that it would back the later performance bond.

In cross-border tenders, a buyer may insist that the bid security come from a bank in its own country. The bidder's bank then issues a counter guarantee to a local bank, which issues the tender guarantee, at extra cost and with an extra layer of credit risk.

Because bid bonds are short-lived and most are never called, fees are modest compared with other guarantees. Banks still treat them as contingent exposures. Under the Basel standardised approach, transaction-related contingent items such as bid bonds and performance bonds generally carry a 50% credit conversion factor, so they consume regulatory capital, though less than a direct credit substitute like a financial standby. Companies that bid often, such as engineering contractors, maintain a dedicated guarantee line so that they can issue many bid bonds at short notice.

Some tendering bodies accept alternatives: a certified cheque or banker's draft, a cash deposit, or a bid-securing declaration in which the bidder agrees to be suspended from future tenders if it backs out. Multilateral development banks allow such declarations in some procurement methods, which helps smaller firms that lack guarantee lines.

For bidders, the main risks are the cost of tying up credit lines across many tenders and the possibility of a demand when a dispute arises over whether the award matched the bid terms. For buyers, the risks are a guarantor too weak to pay or wording that does not cover the real failure, for example a bond that names withdrawal but not refusal to provide the performance security. Reviewing the wording against the tender conditions, checking the issuer and confirming the expiry date are routine steps in public sector procurement offices. Tender teams also watch for forged guarantees, which are a recurring form of trade fraud; authenticating the guarantee by SWIFT message or a direct call to the issuing bank is standard practice. Once the contract is signed, the employer usually holds a retention money guarantee or retention cash as later protection.

• International Chamber of Commerce
• Federal Acquisition Regulation (Acquisition.gov)