A bid guarantee is a kind of security with which a bidder proves they have the means to complete a project. The principal, who is the party that requests bids for a project, will typically get this information from an insurance company, bank or other similarly reputable source. Other terms for bid guarantee include bid bond, bid guaranty, and bid surety.
It is common to collect a written bid guarantee when bids are being accepted for a job, such as from contractors for a building project. The document serves as insurance for the principal that the project will move forward as claimed by the bidder. In addition to proving that the bidder has the necessary funds, it is also confirms their commitment to completing the project.
The bid guarantee is typically an important part of picking an appropriate vendor. It increases the efficiency and speed of the selection process by putting the responsibility for a certain amount of due diligence on the bidder. This frees the principal to focus on the qualifications of the vendor as they relate specifically to the project.
In many cases the bid guarantee will stipulate that it is to be replaced by a performance guarantee once the contract is signed. This document outlines the terms by which the principal will be reimbursed if the winning bidder does not deliver as promised on the project. The terms will typically include a maximum fee to be paid, which is usually the full price of the contract. This kind of document is also known as a standby letter of credit.
When there is not a performance guarantee, the guarantor will usually pay a sum called liquidated damages to the principal if the bidder does not deliver. The amount to be paid is usually whatever amount is the difference between the next highest bid and the winning bid. A typical contract will specifically outline the conditions by which this fee is to be paid.
In addition to protecting the principal, these documents can be beneficial for a bidder as well. They clearly outline the expectations for the project and the conditions by which it will be deemed to be improperly completed. It is also common for there to be a cap on the amount the contractor is to pay the principal if the terms of the contract are not met.