A bid bond is a type of surety bond that guarantees a bidder will honor the terms of its bid and, if awarded the contract, will furnish the required performance and payment bonds and sign the contract. It is a promise from a surety company to the project owner that the bidder will not withdraw or modify the bid in a way that would affect the owner adversely.

Bid bonds are commonly required on public works projects in California—and many private projects—because they protect owners from the cost and delay of re-bidding if a successful bidder refuses to proceed. If a bidder defaults, the bond provides compensation up to a stated percentage of the bid amount.

Typical bid bond amounts are set as a percentage of the total bid—often 5% to 10%—and the bond remains in force for the bid validity period specified in the procurement documents. The surety assesses the bidder’s financial strength, experience, and credit before issuing the bond; this underwriting helps owners prequalify bidders and reduces the risk that the apparent low bidder cannot perform the contract. If a claim is made because the winning bidder withdraws or fails to enter into the contract, the owner may submit documentation to the surety to recover damages up to the bond limit, and the surety may then pursue reimbursement from the principal (the contractor).

Some owners accept alternatives to bid bonds—such as certified checks, cashier’s checks, or proposals secured by deposits—especially on smaller projects, but public agencies in California commonly require bonds under state procurement rules. For contractors, failing to honor a bid bond can lead not only to financial liability for the bond amount and any additional damages, but also to reputational harm and difficulty obtaining future bonding; conversely, maintaining good bonding capacity is an important part of a contractor’s ability to compete for larger, bond-required projects.

California has one of the largest construction markets in the United States, with public infrastructure, schools, water projects, and housing developments continually under construction. In 2023, California construction spending approached hundreds of billions of dollars, with public works and private nonresidential projects forming a significant share.

Bid bonds reduce risk for public agencies and private owners by ensuring only financially viable and committed bidders participate in the process. The bonds discourage frivolous low bids intended to obtain design or pricing information without intent to perform. For public owners, they also maintain compliance with state procurement rules and protect taxpayer funds.

Public projects in California are governed by state statutes that set bonding requirements. Under California Public Contract Code Section 10102 and Section 7106 for public works, many public projects require bidders to provide a bond—often set at a percentage of the bid amount. The Miller Act governs federal projects and requires bid bonds for contracts exceeding $150,000.

Local public entities—cities, counties, school districts, and special districts—often adopt the state standards or specify requirements in contract documents. For private projects, owners may choose to require bid bonds as part of the solicitation for bids.

Typical Percentage Amounts

Commonly, the standard bid bond amount on California public projects is 10% of the total bid. However, the Public Contract Code allows the public agency to require 5% bid bonds in certain cases, and some projects or solicitations specify different amounts—typically 5% or 10%. For federal projects, the Miller Act frequently calls for a 20% bid bond or a specified amount according to contract terms.

When a Bid Bond Is Mandatory

On most California public works projects where the estimated cost exceeds statutory thresholds, the solicitation will require a bid bond. School district projects, transportation department contracts, and water agency procurements commonly include bid bond requirements. For federally funded projects, compliance with the Miller Act ensures bid bond requirements are enforced.

Three parties are involved in a bid bond: the obligee (owner or public agency), the principal (the bidder/contractor), and the surety (the bond company). The principal obtains the bid bond from a surety, which evaluates the contractor's financial strength, work history, and project experience before issuing the bond.

If the bidder wins the contract and later refuses to enter into the contract or fails to provide required performance/payment bonds, the obligee can make a claim against the bid bond. The surety will investigate, and if the claim is valid, the surety will compensate the owner up to the bond penalty—often 5% or 10% of the bid amount—then seek reimbursement from the contractor.

Claim Scenarios and Remedies

Typical claim scenarios include a successful low bidder failing to: sign the contract within the time specified, furnish performance and payment bonds, or meet specific license or insurance requirements. Remedies may include money damages equal to the difference between the defaulting bid and the next lowest compliant bid, administrative costs, or the bond penalty itself.

Limits of Bid Bond Liability

The surety's liability under a bid bond is usually limited to the bond amount stated in the bond form. It does not guarantee actual performance of the work—that is the role of the performance bond, which the contractor must provide after contract award. The bid bond only secures the owner's financial exposure during the award period and the transition to contract execution.

Contractors typically obtain bid bonds from surety companies or agents that issue bonds. The process includes an underwriting review that assesses financial statements, credit history, experience on similar projects, backlog, and the size of the contract relative to the contractor's working capital and bonding capacity.

Smaller contractors may qualify for bid bonds even with limited bonding capacity through local surety pools, bond agents, or through the California Public Utilities Commission or small contractor assistance programs that can help with documentation and introductions to surety companies.

Underwriting Criteria

Underwriting criteria include: a healthy balance sheet with positive net worth, adequate working capital, a clean legal and claims history, relevant experience in the project type, proper licensing, and reliable bank relationships. Financial statements—often audited or reviewed statements—are typically requested for contracts of significant size.

Alternatives When Full Surety Capacity Is Lacking

When a contractor lacks full surety capacity, alternatives may include obtaining a certified check, irrevocable letter of credit (if the owner permits), or partnering with another contractor as a prime or joint venture to meet bonding requirements. For some public projects, the agency may accept other forms of financial security, but bid documents must specify such allowances.

Bid bond premiums vary, but a common range for bond premium is 0.5% to 2% of the bond amount for bid bonds, with lower percentages for high-credit contractors. For a 10% bid bond on a $1 million bid (i.e., $100,000 bond), the premium might range from $500 to $2,000 depending on the contractor's financials, prior claims, and relationship with the surety.

Small or new contractors may face higher premiums or additional requirements like collateral if underwriting poses higher perceived risk. For public projects where bonds are mandatory, budgeting for bonding costs in the bid-financials is crucial.

It is important to distinguish among bid, performance, and payment bonds. A bid bond guarantees the bid's good faith. A performance bond guarantees the contractor will complete the project according to contract terms. A payment bond guarantees payment to subcontractors, laborers, and suppliers.

After award, the contractor typically must furnish performance and payment bonds—commonly each equal to 100% of the contract price—within a specified number of days. Failure to do so can trigger a claim under the bid bond.

Sequence and Timing

The usual sequence: submit bid with bid bond; owner awards contract to lowest responsible bidder; contractor submits performance and payment bonds and signs contract; construction mobilizes. If the contractor does not comply with post-award requirements, the owner can pursue the bid bond.

California's public works laws impose specific requirements including prevailing wage compliance, registration with the Department of Industrial Relations (DIR) for contractors on public works projects, and strict bonding and retention rules. Contractors must be registered with DIR and comply with payroll requirements; failure can result in disqualification or bond claims.

Additionally, public agencies may retain a portion of contract payments unless a bond is provided to substitute for retention. This retention bond protects the owner while allowing contractors greater cash flow if the agency accepts the bond.

Prevailing Wage and Bond Claims

Prevailing wage violations can trigger contractor liability, stop notices, and payment bond claims. Suppliers and subcontractors on public works can pursue claims against payment bonds if unpaid. Having correct bonding in place provides a clear path for remedy while protecting the owner from financial exposure.

Several recurring issues arise with bid bonds: improper bond forms, incomplete bond amounts, failure to sign the bond correctly, and missing licensure or registration at bid time. These defects can render a bid non-responsive and lead to disqualification.                                 

Bid documents should be reviewed carefully for bonding language, required bond percentages, exact wording for obligees, and any localizing provisions. Contractors should work closely with brokers and sureties to deliver compliant bond forms and allow ample time for underwriting—especially on large or complex projects.

Document Checklist for Bidders

Essential items include: completed bid bond form with correct obligee name and bond percentage, proper signatures and corporate seals if required, current contractor license, DIR registration number (for public works), insurance certificates per bid requirements, and any required bid deposits if allowed in lieu of bonds.

Avoiding Last-Minute Surprises

Underwriters can take time to issue bonds for large projects. Early engagement with a surety or broker reduces the risk of last-minute denials. When project size exceeds an established bonding capacity, prequalification with the public agency and exploring joint ventures can be prudent strategies.

When a bid bond claim arises, the surety investigates and seeks to determine if the obligee suffered damages due to the principal's default. Documentation of attempts to secure performance, re-bid costs, and the next-lowest responsible bid generally influence recovery amounts. The surety then pays the obligee and pursues subrogation against the contractor.

Legal disputes can ensue regarding whether the obligee complied with bid documents, whether the bond form was valid, and whether damages claimed are reasonable. California courts have a body of case law interpreting bid bond enforceability, and both owners and contractors should consult counsel for contested claims.

Statute of Limitations and Notice Requirements

Notice provisions in the bond form and statutes of limitation may limit how long an obligee has to make a claim. Prompt action and strict adherence to required notice language increases the chance of a successful claim. Contractors facing potential claims should respond quickly to surety inquiries to avoid default judgments or accelerated recovery actions.

Contractors bidding in California should maintain clear financial records, cultivate strong banking relationships, and work with established sureties. Regularly updating financial statements and maintaining a track record of completed projects of similar size will improve bonding capacity and reduce premiums.

Before bidding, perform a bid/no-bid analysis that includes bonding feasibility. If a project requires a bond larger than current capacity, explore partnerships, joint ventures, or subcontracting arrangements that reduce exposure and satisfy bonding requirements.

Managing Bonding Capacity

Bonding capacity is influenced by net worth and working capital, backlog, and the contractor's relationships with sureties. Increasing net worth through retained earnings, improving collections to bolster working capital, and delivering steady performance on projects can raise bonding limits over time.

Owners should draft clear bid bond requirements and include sample bond forms to minimize disputes. Specifying the acceptable surety list, bond percentage, and whether alternate security is allowed reduces uncertainty. For smaller public projects, consider balancing the administrative burden of high bond percentages with contractor participation goals.

For public agencies seeking competitive pricing, a prudent approach is to require standard bid bonds but also offer prequalification programs to fast-track qualified contractors. Transparency in bid evaluation criteria and clear timelines for bond submission help avoid procurement delays.

Example 1: A regional school district issued a solicitation for a $2.5 million renovation project with a 10% bid bond requirement. The apparent low bidder failed to secure performance bonds within the contract period, prompting the district to claim the $250,000 bid bond. The surety paid the district the bond penalty and later recovered damages from the contractor through subrogation.

Example 2: A general contractor bid on a public water treatment expansion but lacked sufficient bonding capacity for the full contract. The contractor formed a joint venture with an established contractor. The JV provided the required bid bond and ultimately furnished performance and payment bonds after award, enabling project participation that might otherwise have been impossible.

Bond market conditions influence availability and pricing. Following economic cycles, sureties may tighten underwriting during downturns, raising premiums or requiring collateral. Conversely, a competitive surety market can lower costs and expand capacity for qualified contractors.

Large infrastructure funding programs—state bond measures, federal infrastructure bills, and local bond authorizations—can increase demand for bid and performance bonds and place pressure on the surety market. Contractors and public agencies should monitor macroeconomic indicators and plan procurement timelines accordingly.

Before submitting a bid, ensure the following: confirm the required bond percentage and form; verify obligee name and statutory language; confirm DIR registration and contractor license; obtain required financial statements; engage a surety or broker early; and allow time for underwriting and bond issuance.

Additionally, document all pre-bid communications, clarify ambiguities in the bid documents through formal addenda when necessary, and keep a contingency plan for financing and bonding if award conditions change.

Bid bonds play a crucial role in California construction procurement by protecting owners, promoting responsible bidding, and ensuring that awarded contracts proceed to execution. Understanding statutory requirements, bond mechanics, underwriting standards, and market conditions helps contractors and owners navigate the bidding process with greater confidence and fewer surprises.

Proper preparation—timely engagement with a surety, accurate documentation, and awareness of public works nuances like prevailing wage and DIR registration—reduces the risk of disqualification or costly claims. With the right approach, bid bonds become a straightforward tool to secure fair competition and reliable project delivery.