Bid Bonds

Friday, September 7th, 2012


This is a debt secured by a bidder for a construction project or other large ‘project’ on a tender based selection process for providing a guarantee to the potential client that the bidder will take on the contract if selected. If they decline to accept the contract the bond is forfeited, unless they (the bidder) can prove by ‘clear and convincing evidence’ that a non-judgmental mistake was made in the bid.

The amount of the bid bond is a certain percentage (often in the range 5 – 10%) of the price of the contract. It reassures the potential customer that the bidder has the cash flow required for the project/contract deliverables. Otherwise, the guarantor will pay the potential client the difference between the contractor’s bid and the next highest bidder. This difference is a form of liquidated damages which cannot exceed the amount of the bid bond.

The following wording is taken from a draft bid bond.

The Tenderer proposes to submit a tender to you for the above contract. It is a requirement for submitting the tender that a bond in these terms and in the amount of ___% of the amount of the tendered contract sum, be submitted with the tender.

BY THIS BID BOND, we, the Surety, guarantee to you that, if you accept the above t ender, the Tenderer will, within the time required by the contract formed by that acceptance, execute under seal and deliver the Agreement referred to in that contract and give you the fully executed and delivered performance bond and other documents required under clause ____ of the Conditions of that contract, all in compliance with the contract. If the Tenderer fails to do so, or otherwise repudiates its tender, we will, subject to this bond, pay all the loss you sustain as a result, up to a maximum of ________.

This bond will expire on ________ when we will be released of liability under it, unless you have before that dated notified us that the Tenderer has defaulted in any of the obligations guaranteed by this bond.

We will not be released in any way or discharged by time, indulgence, waive, alteration, release or compromise or any other circumstances that might operate as a release of a guarantor at law or in equity.

A call to action

Those who have followed our briefing papers on bonds should now:

i)                    Check the wording of bonds used by your organisation

ii)                   Determine where risks exist and plan the mitigation strategies

iii)                 Ensure that procurement is pro-active in proposing the use of bonds (or not)

And in conclusion

We sincerely trust that these briefing papers have stimulated you to want to learn more about their use and abuse in the commercial world. Examples abound where poor wording has removed the safeguards that were deemed to exist, Check before it is too late. If we can advise please contact us.

The final Article in the series is Parent Company Guarantees