Some information on bid bonds and how they work.

1. BID BONDS:
How They Work

2.  In order to have a better understanding of what bid bonds are, it is first
important to have an understanding of what surety means. In the
bidding process (particularly in the construction industry) not only in
government or federal projects but in big budgeted projects as well,
the surety (normally an insurance company or a bank), sets up a
guarantee that the obligations set forth in the contract for which a bid
was placed, will be done.

3.  Also known as a bid security or bid guaranty, a bid bond is the specific
part of the process of bidding that assures the project owner that the
winning bid will be honored. When dealing with huge amounts of
money, bid bonds facilitate in making the process proceed in a smooth
manner. Without the bond, the owner will have no idea as to who the
bidders are, and whether or not they are financially solvent.

4. HOW TO USE A BID BOND
 Every bidder is required to put up a (usually) small percentage of the
specified contract amount in order to qualify for bidding. The rate
typically ranges between 1 and 3%. When there is no cap in place for a
particular project being bid on, the base amount can be an amount
agreed upon. The surety will hold the money for safekeeping until the
winning bid is announced. The bid losers will then be refunded for the
bond that they put up.

5. HOW TO USE A BID BOND
 On the other hand, the winning bidder will be required to put up a
performance bond that will assure the owner that the job will be
completed in a timely manner as specified in the contract. This is
normally 10% of the total budget for the project. The bid bond is
usually not refunded and just rolled into the new bond if handled by
the same surety company.

6. HOW TO USE A BID BOND
 In case the winning bidder does not deliver on their obligations, the
surety will pay the project owner the difference between the amount of
the awarded bid and the net best bid amount, but this should not
exceed the bid bond total. This is known as liquidated damages. The
surety company will hold on to the winning bond, and will use it instead
to help defray the cost of damages.

7. LEGAL RELATIONSHIPS
 A bid bond is a legal document that binds the signer to a specific part
of the bidding process. Bid, payment, and performance bonds are all
included in the bids and awards process, depending on the discretion
of the project owner. Ultimately, it is the owner that will be responsible
to pay for all funds required for the project. But since he is not the one
handling the procurement of the materials and the hiring of the
required labor, the owner would naturally require assurance that the
money to be paid to the contractors will be appropriately handled.