What is a Bid Bond?

Many suppliers and contractors understand the concept of bid bonds. However, if you are a new business person, you might not really understand why bid bonds are essential, the responsibility they carry, and how they can be obtained.

A bid bond is a type of construction bond that protects the owner or developer in a construction bidding process. It is a guarantee that you, as the bidder, provide to the project owner to ensure that if you fail to honor the terms of the bid, the owner will be compensated. A bid bond is typically obtained through a surety agency, such as an insurance company or bank, and helps guarantee that a contractor is financially stable and has the necessary resources to take on a project. Bid bonds are commonly required on projects that also involve performance bids and payment bonds.

A bid bond typically involves three parties: the obligee, the principal, and the surety. The obligee is the owner or developer of the construction project under bid. The principal is the bidder or proposed contractor. The surety is the agency that issues the bid bond to the principal. The principal purchases the bid bond from the surety for a set price, much like a premium for an insurance policy. The coverage value of the bond is called the penal sum and represents the maximum amount of damages the surety will cover with the bond.

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