Construction Bid Security Requirements: Bonds, Cash & Letters of Credit 2025

Understanding Bid Security Requirements

What is Bid Security

Purpose:

Guarantee

Bidder will sign contract

Typical Amount:

5-10%

Of bid amount

Return:

After Award

To unsuccessful bidders

Bid security protects the owner from contractors who withdraw their bids after submission or refuse to enter into a contract after being awarded. Understanding bid security requirements is essential for contractors pursuing government work, as non-compliance can result in bid rejection.

Why Bid Security Exists

Protects the Owner

• Ensures bidder commitment
• Covers rebidding costs
• Deters frivolous bids
• Price difference protection

When Forfeited

• Withdrawal after opening
• Failure to execute contract
• Failure to provide bonds
• Material misrepresentation

Types of Bid Security

Acceptable Forms

Bid Bond (Most Common)

Three-party agreement where surety guarantees bidder will enter contract. Preferred for large projects.

Certified Check / Cashier's Check

Bank-guaranteed check for specified amount. Ties up contractor's capital.

Irrevocable Letter of Credit

Bank commitment to pay on demand. Less common but accepted by some agencies.

Money Order

Accepted for smaller projects. Must be from acceptable financial institution.

Bid Bonds

How Bid Bonds Work

The Parties

Principal: The contractor/bidder
Obligee: The owner/agency
Surety: The bonding company

Coverage Amount

Typically 5-10% of bid amount, or may be a fixed dollar amount. Some specify penal sum equals difference between low and next bid.

Cost to Contractor

Usually free if contractor has surety relationship. Bond is commitment from surety to provide performance/payment bonds if awarded.

Bid Bond Advantages

No cash tied up
Typically no premium cost
Pre-qualification by surety
Required for federal work

Considerations

Requires surety relationship
Bonding capacity limits apply
Commits to P&P bonds if awarded
Financial qualifications required

Cash and Certified Checks

Cash-Based Bid Security

Certified Check

Personal or company check certified by bank. Bank guarantees funds are available and sets aside the amount.

Cashier's Check

Check drawn on bank's own funds. Considered more secure than certified check.

Return Process

Returned to unsuccessful bidders after award. Winning bidder's security held until contract execution.

Cash Security Drawbacks

Ties up working capital
Limits bidding capacity
Lost interest on funds
Risk of check loss

Letters of Credit

Irrevocable Letters of Credit

Some agencies accept irrevocable standby letters of credit as bid security. Less common but may be advantageous in certain situations.

Requirements

• From acceptable bank
• Irrevocable commitment
• Payable on demand
• Proper expiration date

When to Use

• No surety relationship
• Strong bank relationships
• International contractors
• Alternative to cash

Common Requirements by Project Type

Bid Security Requirements

Project Type	Typical Amount	Acceptable Forms
Federal (FAR)	20% of bid, max $3M	Bid bond, certified check, other per FAR
State DOT	5-10% of bid	Bid bond (usually required)
Municipal	5-10% of bid	Bid bond, certified check, cash
School Districts	10% of bid	Varies by state
Small Projects	Flat amount or %	More flexible options

Best Practices

Bid Security Best Practices

Maintain Surety Relationship
Bid bonds are typically free with a surety relationship. Keep financials current.
Read Requirements Carefully
Each solicitation specifies acceptable forms and amounts. Non-compliance means rejection.
Use Correct Forms
Federal projects require specific SF 24 or SF 28 forms. Use agency-specific forms when required.
Allow Time for Processing
Get bid bonds early. Don't wait until bid day to request from surety.

Common Rejection Reasons

Wrong amount (under required percentage)
Unacceptable form of security
Missing signatures or dates
Surety not authorized in jurisdiction
Expired or conditional security