What is a bid bond? How it works, with numbers

Why owners ask for one

Picking the low bid only works if the low bidder follows through. Without bid security, a contractor could bid low, see the other prices, and walk away, leaving the owner to award at a higher price or rebid. The bid bond puts money behind the bid. It also screens bidders: a surety will not write a bid bond for a contractor it would not later bond for performance and payment, so a bid bond is a sign the bidder is bondable for the job.

Public owners usually must require bid security by law, and the invitation to bid says how much. The amount is often stated as a percentage of the bid. Some owners accept a certified or cashier's check in its place, which ties up the bidder's cash until award.

The parties and the penal sum

• Principal: the bidder.
• Obligee: the owner who invited bids.
• Surety: the bonding company backing the bidder's promise.
• Penal sum: the most the surety will pay under the bond.

Many sureties charge little or nothing for a bid bond to a contractor they already bond, because the real exposure is the performance and payment bonds that follow.

What a claim pays

The bond's own terms decide the measure, so read the form. Many bid bond forms limit the owner's recovery to the smaller of two numbers: the penal sum, or the extra cost of awarding the job to someone else, usually the difference between the defaulting bid and the next acceptable bid. The owner cannot collect more than it actually lost.

A worked example with invented numbers

Three bids come in on a public warehouse. The bid documents require a bid bond of 10% of the bid.

Bidder A's penal sum is 2,400,000 x 0.10 = $240,000. A is awarded the job but refuses to sign. The owner awards to B.

• The owner's extra cost is 2,515,000 - 2,400,000 = $115,000.
• That is less than the $240,000 penal sum, so under a form that pays the smaller amount the surety owes $115,000.
• Check: 2,400,000 + 115,000 = 2,515,000, and 115,000 is under 240,000.

Now change one number. If B had also withdrawn and the owner awarded to C, the extra cost would be 2,640,000 - 2,400,000 = $240,000, exactly the penal sum. If C had bid $2,700,000, the extra cost would be $300,000, and the surety would pay only the $240,000 cap. Either way, the surety then turns to Bidder A under the indemnity agreement to be repaid.

Mistakes and withdrawals

A bidder who finds a clerical error after bids open, such as a dropped line item, may in some cases be allowed to withdraw without forfeiting the bond. Whether that is allowed, how quickly the bidder must act, and what proof is needed depend on the state's law and the bid documents. Do not assume a withdrawal right. Bids are usually firm for a stated period after opening, and the bid bond covers that period.

Common mix-ups

• Thinking the bid bond protects the bidder. It protects the owner. The bidder repays any claim.
• Assuming the owner keeps the whole penal sum. Most forms pay the actual loss, capped at the penal sum.
• Confusing the bid bond with the performance bond. The bid bond ends when the contract is signed and the other bonds are delivered. The bid bond vs performance bond vs payment bond guide compares all three.

On the NASCLA exam

Bid bonds fall under Procurement and Contracting Requirements, 31 of the 115 scored questions. Bidding, bonds and contract formation all appear in the NASCLA Contractors Guide to Business, Law and Project Management, so tab its bonds and bidding topics. Practice the claim arithmetic with a calculator: smaller of the penal sum and the extra cost.

Practice it

Read the bid bond vs performance bond vs payment bond comparison, then price the bid itself with markup vs margin. Once the contract is signed, lump sum vs cost-plus vs GMP explains who carries the cost risk. How large a bond a surety will write is covered in bonding capacity and surety prequalification, and what a general contractor may do with sub prices after bid day in bid shopping and bid peddling.

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Sources

Show the list

• PSI Candidate Information Bulletin 1458, content outline and reference list, updated 7 Jul 2026. Retrieved 5 Nov 2026.
• NASCLA Commercial Exam, NASCLA. Retrieved 5 Nov 2026.