Bid bonds and performance bonds are both types of contract surety bonds used in the construction industry, but they serve different purposes at different stages of a project. Contractors who are new to bonded work often confuse the two or wonder why both are needed. Understanding the distinction between these bonds, when each is required, and how they work together is essential for any contractor pursuing public or bonded private projects.
A bid bond is submitted alongside a contractor's bid on a construction project. It guarantees that the contractor has submitted the bid in good faith and will enter into the contract at the bid price if they are selected as the winning bidder. The bid bond protects the project owner from the risk of a contractor submitting a lowball bid to win the project and then either withdrawing or refusing to sign the contract.
If a contractor wins a project and fails to execute the contract, the surety company may be liable for the difference between the winning bid and the next lowest bid, up to the penal sum of the bond. Bid bonds are typically set at 5% to 10% of the total bid amount. In most cases, there is no separate premium charged for a bid bond, as it is issued in anticipation of the contractor obtaining performance and payment bonds once the project is awarded.
A performance bond is required after a contractor has been awarded a project and has signed the contract. It guarantees that the contractor will complete the project in accordance with the contract terms, specifications, and timeline. If the contractor defaults on the project, whether by abandoning the work, performing substandard work, or failing to meet deadlines, the surety company is obligated to step in and ensure the project is completed.
The surety may fulfill this obligation by financing the original contractor to complete the work, hiring a replacement contractor, or paying the project owner for the cost of completion, up to the bond amount. Performance bonds are typically written for 100% of the contract value. The premium for a performance bond is usually calculated as a percentage of the contract amount, generally ranging from 1% to 3% for well-qualified contractors.
The fundamental difference between a bid bond and a performance bond is timing and purpose. A bid bond is required at the bidding stage and guarantees that the contractor will honor their bid. A performance bond is required after the contract is awarded and guarantees that the contractor will complete the work. The bid bond protects the project owner during the selection process, while the performance bond protects the project owner during the construction process.
Cost is another significant difference. Bid bonds are generally provided at no additional cost to the contractor because they are considered a precursor to the performance bond. The surety issues the bid bond with the understanding that, if the contractor wins, they will purchase performance and payment bonds for the project. Performance bonds carry a premium that is based on the contract amount and the contractor's risk profile.
In the typical construction bonding process, the bid bond comes first. When a project owner issues a request for bids on a bonded project, they require each bidding contractor to submit a bid bond along with their proposal. This ensures that only serious, financially qualified contractors participate in the bidding process. Once the winning bid is selected and the contractor signs the contract, the bid bond is replaced by the performance bond (and usually a payment bond as well). The performance bond then remains in effect for the duration of the project and, in many cases, for a warranty period after completion.
Because the surety company that issues a bid bond is committing to provide the performance bond if the contractor wins, obtaining a bid bond is essentially the same as being pre-qualified for a performance bond on that project. The surety evaluates the contractor's financial statements, credit, experience, and the specific project details before issuing the bid bond. If the surety is not comfortable with the risk, they will decline to issue the bid bond, which prevents the contractor from bidding on the project in the first place.
On most public works projects and many private bonded projects, yes, you will need both a bid bond and a performance bond (along with a payment bond). The federal Miller Act requires bid bonds, performance bonds, and payment bonds on all federal construction projects exceeding $150,000, and most states have similar requirements for state and municipal projects. Even on private projects where bonding is required, the project owner will typically require all three bonds as part of the bidding and contracting process.
If you are a contractor looking to bid on bonded projects, the first step is establishing a relationship with a surety bond agent who can help you get pre-qualified for bonding. SuretyBondly works with multiple surety companies and can help contractors of all sizes obtain the bid bonds, performance bonds, and payment bonds they need to pursue and win bonded work.