bid bond

A bid bond is a guarantee from a bank or insurer that secures an amount for the contracting authority if a supplier withdraws its tender during the validity period, or refuses to sign the contract after award. It is not the same as a performance bond, which secures that the contract is actually carried out. The bid bond covers the tender stage, while the performance bond covers delivery and the defects liability period.

How does a bid bond work?

Your tender is binding during the tender validity period. If you withdraw it, or refuse to sign once you have won, the contracting authority can call the bond. The bond expires when the contract is signed or the validity period ends.

Directive 2014/24/EU has no specific rules on bid bonds. Contracting authorities may still require one in the tender documents and contract performance conditions, as long as the requirement is proportionate. Practice varies across Europe. Spain's public procurement law (LCSP) allows a provisional guarantee of up to 3 percent of the tender budget, but only when the authority justifies it. In Germany, bid bonds are rarely used in practice. They are more common in international projects, for example those based on FIDIC contracts, and the UNCITRAL Model Law on Public Procurement has its own rules on tender securities. The amount there is typically a few percent of the tender sum.

You will meet performance bonds far more often. They cover defects and delays, including claims for liquidated damages. Levels for works contracts depend on national standard contracts. In Germany, VOB/A says security should not exceed 5 percent of the contract sum for performance and 3 percent for defects. In Norway, the standards NS 8405 and NS 8407 work like this:

• During execution: The contractor provides security of 10 percent of the contract sum.
• After takeover: The security is reduced to 3 percent for the three-year defects period.
• Deadline and form: The security must be provided no later than 14 days after the contract is concluded, usually as a surety guarantee from a bank or insurer.
• The client: The standards also require the client to provide security (15 percent under NS 8405 and 17.5 percent under NS 8407), but Norwegian public clients often deviate from this.

Both bid bonds and performance bonds must respect the principle of proportionality. A high guarantee on a small contract can shut out small suppliers without giving the authority any real benefit.

An example: A contractor wins a Norwegian NS 8407 contract worth NOK 50 million. Within 14 days it must provide a bank guarantee of NOK 5 million. After takeover the guarantee is reduced to NOK 1.5 million, which stays in place for three years. Had the tender also required a 2 percent bid bond, the contractor would have needed NOK 1 million in security when submitting the tender.

Why does a bid bond matter for suppliers?

Guarantees cost money. The bank or insurer charges an annual fee, and the guarantee uses up part of your credit line. That cost belongs in your calculation before you set the price. Check guarantee requirements early and talk to your bank before the submission deadline. If you cannot obtain the guarantee after winning, you cannot fulfil the contract, and the authority may claim damages or move on to the next supplier. Tools like Cobrief help you spot guarantee requirements in the tender documents before you spend time on the bid.

Frequently asked questions

Can a contracting authority require a bid bond?

Yes. It is not prohibited, but the requirement must be stated in the tender documents and be proportionate to the value and risk of the contract. Some national laws, such as Spain's, add their own limits.

Does the guarantee cost anything?

Yes. You pay an annual fee, calculated on the guaranteed amount. Include the cost in your price, including the years of the defects period.

What is the difference between a surety guarantee and an on-demand guarantee?

With a surety guarantee, the authority can claim directly from the guarantor when you are in breach, but the guarantor can raise the same objections as you. An on-demand guarantee is paid on first written demand, without the authority having to prove a breach. It is therefore stricter for you.

In short: a bid bond secures that you stand by your tender, a performance bond secures that you deliver. In many markets you mostly meet the second, but both must be priced into your bid.