Bid Bond

A bond that a bidder to a construction project buys to guarantee that it has the means to complete the project should it be awarded the contract. The amount of a bid bond is a certain percentage of the price of the contract. It exists to reassure the company awarding the contract that the bidder has the cash flow needed for the project. Otherwise, the guarantor will pay the customer the difference between the contractor's bid and the next highest bidder. This difference is called liquidated damages which cannot exceed the amount of the bid bond. Unlike a fidelity bond, a bid bond is not an insurance policy, and (if cashed by the principal) the payment amount is recovered by the guarantor from the contractor. Also called bid guaranty or bid surety. The bidder is reimbursed for the bid bond if it does not receive the contract.