In competitive construction bidding, a low price alone does not guarantee that a project will move forward smoothly. Project owners need assurance that the contractor who wins the bid will actually sign the contract and begin work under the terms submitted. This is the problem bid security is designed to solve.
This article explains what bid security is, the forms it commonly takes, how requirements differ between public and private projects, and how it relates to bid bonds, performance bonds, and payment bonds. It also compares the most widely used forms by cost, protection, and practicality, so contractors and project owners can better understand what to expect during procurement.
What is bid security
Bid security is a financial guarantee submitted by a contractor alongside a bid, assuring the project owner that the bidder is serious and financially capable of entering into the contract if selected. It protects the owner from the cost and delay of a bidder withdrawing or failing to sign after being awarded the work.
The amount of bid security required is typically calculated as a percentage of the total bid price, most commonly in the range of 5 to 10 percent, though this can be higher on large public projects. If the winning bidder fails to honor the bid, the owner can claim the security to cover the added cost of selecting another contractor or re-bidding the project.
Bid security is a broad category that includes several different financial instruments. A bid bond is the most common form used in United States construction, but cash, certified checks, and letters of credit are also accepted depending on the project and the owner’s requirements. Although the two terms are often used interchangeably, a bid bond is only one type of bid security, not the entire concept.
Why project owners require bid security
Bid security exists primarily to reduce risk during the procurement process. Without it, a contractor could submit a low bid to win a project and then withdraw or renegotiate once selected, leaving the owner to restart the bidding process at added cost and on a delayed schedule.
Requiring it accomplishes several goals for the owner:
- Filters out unserious bidders: The financial commitment involved discourages contractors who are not genuinely prepared to take on the project.
- Protects against financial loss: If a bidder defaults, the owner can recover the difference between the winning bid and the next qualified bid.
- Preserves procurement integrity: A consistent requirement ensures all bidders are held to the same standard, supporting a fair and transparent process.
- Maintains project momentum: Because re-bidding is costly and time-consuming, this requirement reduces the likelihood that a project stalls after award.
Common forms of bid security
Bid bond
A bid bond is a three party agreement between the contractor submitting the bid (the principal), the project owner (the obligee), and a surety company that guarantees the bid (the surety). If the contractor wins the bid but fails to sign the contract or provide the required performance and payment bonds, the surety compensates the owner up to the bond amount, typically the difference between the winning bid and the next lowest qualified bid.
Bid bonds are issued by surety companies after they evaluate the contractor’s financial standing, project history, and bonding capacity. Most sureties do not charge a separate fee for a bid bond itself, since the cost is generally factored into the premium for the performance bond that follows if the contractor is awarded the project.
Cash, cashier’s check, or certified check
Cash and check based security are more common on smaller or private projects where the administrative process of a bid bond may not be necessary.
- Cash deposits: A direct deposit held by the owner and returned once the contract is signed or forfeited if the bidder defaults.
- Cashier’s check: A check issued and guaranteed by the bidder’s bank using the bank’s own funds, offering strong assurance that it will not bounce.
- Certified check: A personal check verified by the bank to confirm that sufficient funds are on hold to cover the amount, though it draws from the account holder’s funds rather than the bank’s.
These forms are straightforward to process but tie up a contractor’s liquid capital for the duration of the bidding period, which can limit their usefulness on larger contracts where multiple bids may be pending at once.
Irrevocable letter of credit
An irrevocable letter of credit is issued by a bank on behalf of the contractor, guaranteeing payment to the project owner up to a specified amount if the contractor fails to meet their bid obligations. Because it cannot be altered or canceled without the agreement of all parties, it offers a high level of assurance.
Letters of credit are generally used by established contractors with strong banking relationships, particularly on large scale public and private projects. They are also common on international construction work, where a bank guarantee can carry more weight than a domestic surety bond.
Bid security vs bid bond vs performance and payment bonds
These terms are often used interchangeably, which leads to confusion during procurement. Each instrument serves a different purpose at a different stage of the project.
| Instrument | When required | What it protects | Typically held by |
| Bid security | At bid submission | Owner’s cost of re-bidding if the winning bidder withdraws | Owner, until contract is signed or bid is unsuccessful |
| Bid bond | At bid submission (the most common form) | Same protection, backed specifically by a surety company | Owner, released after contract execution |
| Performance bond | After contract award | Owner’s protection if the contractor fails to complete the work per contract terms | Owner, held for the duration of construction |
| Payment bond | After contract award | Subcontractors and suppliers, ensuring they are paid even if the general contractor defaults | Owner, on behalf of subcontractors and suppliers |
Public vs private project requirements
Requirements can differ significantly depending on whether a project is publicly or privately funded:
| Factor | Public projects | Private projects |
| Legal requirement | Often mandatory under federal or state statute (Miller Act and Little Miller Acts) | Set at the discretion of the project owner or developer |
| Accepted forms | Usually limited to bid bonds, and sometimes certified checks | May accept bid bonds, cash, checks, or letters of credit |
| Typical percentage | Commonly 5 to 10 percent, sometimes up to 20 percent on large federal work | Varies by project, often negotiated between owner and bidder |
| Oversight | Subject to public procurement law and audit requirements | Governed by the terms set in the project’s bidding documents |
How contractors obtain bid security
Securing it typically follows a consistent process, regardless of the instrument type involved.
- Review the bid documents: Confirm the required type, amount, and submission deadline for this requirement as outlined in the invitation to bid or request for proposal.
- Contact a surety broker or bank: Bid bonds are arranged through a surety broker, while cash deposits, certified checks, and letters of credit are handled directly with a financial institution.
- Submit financial and project information: Sureties and banks evaluate the contractor’s financial statements, credit history, and past project performance before approving the request.
- Receive underwriting approval: Once the contractor’s bondability is confirmed, the surety or bank issues the security in the required format.
- Submit the bid package: This security is included with the bid documents and submitted to the project owner by the deadline.
Comparing bid security options by cost, protection, and practicality
Each option involves a different balance of cost, protection, and ease of use.
| Type | Typical cost to obtain | Protection for owner | Best suited for |
| Bid bond | Usually no separate fee, cost is built into later bonding | High, backed by a surety company’s financial strength | Public projects and most competitive private bids |
| Cash or certified check | No direct fee, but ties up the bidder’s capital | Moderate, limited to the deposited amount | Smaller private projects |
| Irrevocable letter of credit | Bank fees apply, based on the contractor’s credit | High, backed by the issuing bank | Large scale or international projects with established contractors |
Conclusion
Bid security protects project owners by ensuring only serious, financially capable contractors compete for the work, and a bid bond remains the most common way to meet that requirement. Since forms and percentages vary by project and by public versus private status, always confirm the specific requirements in the bid documents or with a surety provider before submitting.
If you have questions about preparing for your next bid, Alliance EDS, based in Denver, Colorado, offers honest, experience backed guidance for contractors and property owners. Call (720) 484-8181 to talk through your project.
Frequently asked questions (FAQs)
Is bid security refundable?
Yes. Bid security submitted by unsuccessful bidders is returned after the contract is awarded. The winning bidder’s security is released once the contract is signed and any required performance and payment bonds are in place.
What happens if a contractor withdraws a winning bid?
The project owner can claim the security to cover the added cost of awarding the contract to the next qualified bidder or re-bidding the project entirely.
How much does bid security typically cost a contractor?
A bid bond generally carries no separate charge, since its cost is built into the premium for the performance bond issued later. Cash and certified checks have no direct cost but tie up capital, while letters of credit involve bank fees based on the contractor’s creditworthiness.
Is bid security required on every construction project?
No. It is standard practice and often legally required on public projects, but private owners decide for themselves whether to require it and in what form.
What is the difference between bid security and a bid bond?
Bid security is the broader concept describing any financial guarantee submitted with a bid. A bid bond is the specific, most commonly used instrument for satisfying that requirement in United States construction.
