Bid Bonds: What the Bidder Promises, How the Amount Is Set and What Refusing the Award Costs

The amount of a bid bond is a policy choice made by the legislature or the owner, and it is stated in the invitation for bids. It is usually a percentage of the total bid, so a bidder submitting alternates or unit prices should confirm which number the percentage applies to before the bond is executed. A bond written for the wrong amount, to the wrong obligee or without the surety's power of attorney can make the bid nonresponsive.

The four rule sets this site's buyers meet most often differ in amount, in the forms of security accepted and in who may write the bond. Agencies can and do add requirements in their own bid documents, so the statute sets the floor and the bid package sets the actual terms.

• California cities: bids are accompanied by cash, a cashier's or certified check or a bidder's bond executed by an admitted surety insurer, and the security is at least 10 percent of the amount bid; a bid without it is not considered (Public Contract Code §20170 and §20171).
• California counties: construction bids carry the same four forms of security, and the county returns an unsuccessful bidder's security within a reasonable period, never more than 60 days after award (Public Contract Code §20129).
• Texas counties: for public works or contracts over $100,000, the bid specifications may require a bid bond of 5 percent of the total contract price, executed by a surety company authorized to do business in Texas (Local Government Code §262.032).
• Arizona agents: every proposal carries a certified check, cashier's check or surety bond for 10 percent of the bid, and the bond must come from a surety holding an Arizona certificate of authority, never an individual surety (A.R.S. §34-201).
• Federal contracts: a bid guarantee is required whenever a performance bond or performance and payment bond is required, in an amount of at least 20 percent of the bid price but not more than $3 million (FAR 28.101-1 and 28.101-2).

What the bidder owes when it walks away depends on which rule governs. In a California city under Public Contract Code §20172, if the successful bidder fails to execute the contract, the amount of the bidder's security is forfeited to the city, subject to the relief-of-bidders procedure. Section 5106 lets the agency award to the second-lowest bidder and then the third, and the security of a second or third bidder who also refuses is forfeited the same way. Section 5105 bars a bidder that claims a mistake or forfeits its security from bidding again on that project.

Arizona's statutory form takes a different measure. The surety's obligation is the difference between the defaulting bid and the larger amount the agency pays in good faith to another contractor, capped at the bond penalty. A bidder that was low by a small margin may owe little; one that was far below the next bid may owe the full penal sum.

On federal work, the bid guarantee clause at FAR 52.228-1 gives the successful bidder 10 days after it receives the forms to execute the contract documents and furnish executed bonds. If it fails, the contracting officer may terminate the contract for default, the bidder is liable for any cost of acquiring the work that exceeds its bid, and the bid guarantee is available to offset the difference. In each case, whatever the surety pays comes back to the bidder under the indemnity agreement.

A math error on bid day does not by itself release the bidder or its bond. California's relief-of-bidders chapter states that a bidder is not relieved of its bid without the awarding authority's consent and that no change may be made in the bid because of a mistake. The bidder's remedy is to sue the public entity to recover the forfeited amount, and the complaint must be filed and served within 90 days after bid opening. A bidder that loses the suit pays the entity's costs, including a reasonable attorney fee set by the court.

To win, the bidder must show four things under Public Contract Code §5103: a mistake was made; it gave the public entity written notice of the mistake within five working days after bid opening, excluding weekends and state holidays, explaining in detail how it occurred; the mistake made the bid materially different than intended; and the error happened in filling out the bid, not through an error in judgment or carelessness in inspecting the site or reading the plans and specifications. A missed quantity on a takeoff sheet is a different argument from a misjudged production rate.

In practice, the estimator's working papers decide these disputes. Contractors that keep dated takeoffs, subcontractor quotes and the spreadsheet as submitted are in a position to document a clerical error within the five-day window. Tell the surety as soon as a mistake is found, because the surety is the party the agency will pursue for the security.

Owners read a bid bond as a signal that a qualified surety stands behind the bidder, and sureties treat it the same way. Most will not write a bid bond on a job they would not later support with performance and payment bonds, so the underwriting happens before the bid, not after award. A contractor with an established program usually submits a short request for each bid; a first-time principal goes through the full credit review described on the surety pages before any bid bond is issued.

A typical bid bond request asks for the owner and project, bid date, estimated bid amount, required bond percentage, duration, liquidated damages, retention, the scope the contractor will self-perform and the major subcontractors. Underwriters compare the job to the contractor's single and aggregate limits and to the current work-in-progress schedule. A job that would push uncompleted backlog past the aggregate, or that is a new type of work or a new state, can draw questions or a conditional approval.

Some owners also ask for a consent of surety letter or a separate statement that the surety intends to furnish the final bonds if the bidder is awarded the contract. That letter is not a guarantee of final bonds; sureties condition it on the contract terms, the bidder's financial condition at award and no material change in backlog. Read those conditions before bid day.

Most bid bond problems are clerical, and agencies treat some of them as fatal. On federal sealed bids, noncompliance with a bid guarantee requirement requires rejection of the bid, though FAR 28.101-4 lists situations where the contracting officer waives it unless accepting the bid would harm the government: only one offer was received; the guarantee is short but covers the gap to the next acceptable offer; or the bond is unsigned by the offeror, misdated or undated. State and local agencies set their own rules, and many reject any irregular bid security.

Arizona and California also restrict who may write the bond. Arizona requires a surety company holding an Arizona certificate of authority and bars individual sureties on public work bid bonds. California city and county bidder's bonds must be executed by an admitted surety insurer, and Code of Civil Procedure §995.311 makes the approving agency verify admitted status. Confirm that status before bid day rather than at award.

For civil and underground contractors that bid many unit-price jobs, a short internal check before each bid closes most of these gaps: correct obligee name, bid date and project number, a penal sum that matches the required percentage or a fixed amount that clears it, the surety's seal and power of attorney, signatures by authorized officers and any agency-specific form the instructions require.

Private owners and developers ask for bid bonds less often than public agencies, but some do on large or lender-financed projects, usually to confirm a bidder can be bonded before the owner commits to a negotiated price. The terms then come from the owner's instructions to bidders rather than from statute, so the amount, the damages measure and the time to sign the contract are all negotiable and should be read carefully.

General contractors sometimes require bid bonds from key subcontractors, especially for site work, utilities and paving packages that carry a large share of the prime contract. That protects the GC if a subcontractor that carried its number on bid day will not sign afterward. A subcontractor asked for a bid bond goes through the same surety review and indemnity as a prime bidder.