On competitively bid construction projects owners frequently require the posting of "bid bonds."
Bid bonds are bonds signed jointly by bidders and someone who agrees to guarantee the bidders' bids-usually a corporate bonding company, which is also known as a "surety." The bonding company on the bid bond becomes responsible in the event that the bidder fails or refuses to enter into a contract with the owner in compliance with the bid solicitation and his bid.
For example, Owner solicits sealed bids for its contemplated office building project. At the bid opening General Contractor submits the low bid. Owner then sends General Contractor company the construction contract for signature.
If General Contractor refuses to sign the contract without justification, Owner has a claim against the bid bond.
What Owner may be entitled to recover would depend upon the bond language itself and the circumstances. Many bonds provide that the bonding company will be liable for any additional cost or expense incurred by the owner in awarding the contract to another contractor - up to the dollar limit of the bond.
Other bid bond forms allow the owner to recover the full amount of the bid bond (the "penal sum") upon default. | Note that the contractor and bonding company may have legal excuses (defenses) for the contractor's refusal to enter into a contract pursuant to his bid. Some of those defenses may include:
- Timely withdrawal of the bid by the contractor because of mistake,
- Failure of the owner to present a contract with terms complying to the solicitation or the bid;
- Failure of the owner to present a contract within any time limitation fixed by the solicitation or, absent a fixed time, within a reasonable time after the bid opening; or
- Some other critical irregularity in the bidding process.
Since the risk involved in competitive bidding may involve substantial dollars, it is imperative that bidders and their bonding companies use great care in preparing and submitting bids and in responding to contract awards.