What is a bid bond?
A bid bond guarantees compensation to the owner should the subcontractor fail to perform the work at the original bid price.
Why does the owner need a guarantee for performance and price? Every project has a budget and a timeline. Most owners have other stakeholders in the project to whom they are accountable, so there is a real need to stay within the budget and on schedule. A subcontractor who suddenly refuses to do the work or refuses to do it at the original price is a big problem for the owner, so they safeguard against it with a bid bond.
Bid bonds are common in government or municipality jobs, since they have budgeted specific taxpayer dollars to perform a certain project. They need to know when they put out a bid that the subcontractors awarded the work will stay within budget and can perform the work.
How does a bid bond work?
What happens if the subcontractor doesn’t perform the work, or says they can’t perform the work at the originally bid price? The owner can then go to the subcontractor’s bond agency. The bid bond typically covers the difference between the lowest and second lowest bid, and this amount is paid by the bonding company to the owner. The bonding company may sue the contractor, depending on the bond’s terms, to recover the costs. The agency may also seek to install a new contractor at the original bid price or lower.
Recommended Reading
https://mobilizationfunding.com/2018/02/22/make-construction-company-bondable/