What Is a Bid Bond?

The short answer

A bid bond is a surety bond used as a possible form of bid security where it is permitted by the applicable procurement rules, bidding documents or contract. It supports the Principal's commitment as bidder: to stand by the bid, accept the award if made, sign the contract and provide any required follow-on security, subject to the terms and conditions of the bond.

The procurement security requirement and the surety bond are not the same thing. The requirement is the obligation stated by the procuring entity, project owner or buyer. A surety bond is only one possible form of satisfying that requirement where the governing documents allow it.

What a bid bond is

A bid bond is a three-party undertaking connected to the bidding stage.

Principal — the bidder

The Principal is the contractor, supplier or business submitting the bid. It is the party promising to keep its bid valid and to proceed with the contract if awarded.

Obligee — the party receiving bids

The Obligee is the procuring entity, project owner or buyer that requires bid security and benefits from the bond.

Surety — the issuer

The Surety is the insurance or surety company authorized to conduct the applicable surety business and issuing the bond. The Surety's undertaking is limited to the wording and conditions of the bond.

Procurement security requirement vs. surety bond form

For Philippine government procurement, bidders should read the procurement security requirement under Republic Act No. 12009, the New Government Procurement Act, its applicable IRR, and the specific bidding documents for the procurement.

That framework may require security at the bidding stage, but the requirement and the form used to satisfy it must be distinguished. The procurement security requirement is the rule or document-based obligation. A surety bond is a possible form of security only where the applicable framework and bidding documents permit that form.

This means a bidder should not assume that every government procurement requires a surety bond, or that a surety bond is always the only acceptable form of bid security. The controlling source is the current law, applicable IRR, bid documents and the wording required by the Obligee.

The obligation the bond supports

A bid bond usually supports obligations that arise during the bidding process. Depending on the bidding documents and the bond wording, those obligations may include keeping the bid open during the required period, not withdrawing the bid improperly, accepting an award made in accordance with the bidding documents, signing the contract and posting any required follow-on security.

It does not mean the Surety evaluates the bid price, decides whether the bidder should win, or guarantees later project success.

When a bid bond may be required

Government procurement and private tenders may require security at the time a bid is submitted. Depending on the applicable rules and bidding documents, a surety bond may be an acceptable form for certain security requirements. Other forms may also be allowed. The controlling source is the requirement document itself, not the generic name of the bond.

Applicants should review the actual document before applying. It should identify what form of security is accepted, who the Obligee is, what wording is required, and what event releases or discharges the security.

How a bid bond generally works

The Principal submits the requirement document and supporting company records to the applicable insurer or Surety for evaluation. Evaluation, underwriting, requirements, terms, approval and issuance remain functions of the insurer or Surety.

If the application is approved and the bond is issued, the Principal submits the bond as part of the bid package where that form is accepted. If the bid is not awarded or the Principal performs the bid-stage obligations, the bond normally expires or is released according to the applicable documents. If the Principal fails to meet a bonded bid-stage obligation, the Obligee may make a claim. The Surety's response depends on the bond wording, the facts, the applicable documents and law. Payment is not automatic merely because a dispute exists.

Practical points applicants should check

• Confirm that a surety bond is an accepted form of bid security for that procurement or tender.
• Confirm the current governing framework, including Republic Act No. 12009, its applicable IRR and the specific bidding documents for Philippine government procurement.
• Match the exact Principal and Obligee names to the requirement documents.
• Check the required bond wording and the event that releases or discharges the bond.
• Prepare for the next stage before bidding, because an award may lead to a performance bond or other security requirement.
• Submit the actual bidding document or bond clause so the insurer can evaluate the requirement accurately.

Important limitations

A bid bond supports the bid-stage undertaking. It is not a performance bond, not a warranty bond and not project financing. It does not replace the Principal's responsibility to read the bidding documents, price the bid properly and confirm that follow-on bond requirements can be met if the contract is awarded.