What Is a Bid Bond? How It Protects Project Owners and Contractors

In construction, few documents carry as much weight as the bid bond.

It’s the first step in the bonding process that proves a contractor is both serious and capable of taking on a project.

While project owners often see it as protection, the bid bond also benefits contractors by demonstrating credibility and financial strength.

Understanding the Bid Bond

A bid bond is a three-party agreement between:

• The principal – the contractor submitting the bid,
• The obligee – the project owner inviting bids, and
• The surety – the company guaranteeing the bond.

When a contractor submits a tender, the obligee requires a bid bond as a guarantee of accountability.

It ensures that if the contractor is awarded the job, they will honour their bid and proceed to sign the contract at the submitted price.

For example:

• Contractor A bids $120,000 for a project.
• Contractor B bids $115,000 and wins.
  If Contractor B later refuses the contract or cannot fulfill the work, the project owner may claim the difference — in this case, $5,000 — from the contractor and their surety.

This mechanism prevents unreliable bids and ensures the tendering process remains fair and financially secure.

A bid bond also guarantees that the contractor can later secure performance and payment bonds, which are typically required once a contract is awarded.

Why Bid Bonds Are Required

Bid bonds serve several purposes at once:

1. They filter out unqualified bidders.
   The process to obtain a bid bond is nearly identical to that of a performance bond. If a contractor can’t qualify for a bid bond, they likely won’t qualify for the contract itself.
2. They protect project owners from financial loss.
   Should the winning bidder default or withdraw, the bid bond provides compensation to cover the difference between the defaulted bid and the next-lowest bidder.
3. They promote confidence and transparency.
   Requiring a bid bond signals that the project owner is committed to a legitimate, fair competition where only capable bidders participate.

How Bid Bonds Protect Both Parties

For Project Owners:

A bid bond offers a financial safety net. It guarantees that if the selected contractor fails to honour their bid, the surety will compensate the owner or arrange for another qualified contractor to complete the work under similar terms.

For Contractors:

A bid bond acts as a mark of credibility.

When a surety issues a bond, it means the contractor has undergone rigorous vetting — their character, capital, and capacity have been reviewed and approved.

This stamp of trust can set a contractor apart in a competitive bidding process and open doors to larger public and private projects.

Typical Bid Bond Requirements in Ontario

While specific requirements vary between sureties, three key factors determine whether a contractor qualifies for a bid bond:

1. Capacity – The surety assesses whether the contractor can handle the workload based on past projects and current commitments.
   "Can this contractor realistically complete the project on time and on budget?"
2. Character – The surety reviews the contractor’s reputation and track record. A history of incomplete projects or unresolved disputes can be red flags.
3. Capital – A deep review of the company’s financial health.
   Because a bond is a guarantee, not an insurance policy, the surety must have full confidence in the contractor’s financial stability.

Through this due diligence, the surety effectively vouches for the contractor — assuring the project owner that they’re financially sound and professionally reliable.

How to Secure a Bid Bond

Contractors must obtain bid bonds through a qualified insurance broker who specializes in surety.

The broker works with a surety company to review the contractor’s financials, project history, and current obligations.

Once approved, the surety issues a bid bond specific to the project, confirming that the contractor has met all necessary qualifications to perform the work if selected.

For contractors, establishing a relationship with an experienced surety broker can make the process smoother — and can unlock access to future opportunities that require bonding.

The Bottom Line

A bid bond is far more than a formality. It’s the foundation of trust between contractor and project owner — ensuring bids are genuine, projects are completed, and everyone involved operates on solid financial footing.

At Buildsure, our specialists help contractors navigate the bonding process from start to finish. Whether you’re bidding your first public project or expanding your capacity for larger contracts, our team connects you with the sureties and expertise you need to succeed.

Contact us today to discuss your next project and secure the confidence that comes with proper bonding.