Bid Bonds and Performance Guarantees Explained

Many tenders require a financial guarantee: a bid bond with your offer, a performance guarantee if you win, sometimes a guarantee for the advance payment as well. They confuse first-time bidders because they combine procurement, banking and insurance, and getting one wrong can disqualify an otherwise winning bid. This guide explains what each instrument is, who issues them, what they cost, and the traps.

Why buyers ask for guarantees

A tender is a binding offer. If a winning bidder walks away, withdraws, or fails to sign, the buyer loses time and may have to re-tender or accept a higher price. If the contractor does not perform, the buyer is exposed. Guarantees move that risk to a bank or insurer so the buyer can be paid quickly without going to court. They also act as a filter against non-serious bids.

The main types

Bid bond (tender security, bid security)

Lodged with the bid. It guarantees that you will not withdraw within the bid validity period and that, if awarded, you will sign the contract and provide the performance guarantee. If you break those promises, the buyer can claim the amount. The amount is stated in the tender, either as a fixed sum or a percentage of the bid price; it varies by country and buyer, and is commonly a low single-digit percentage. It is returned to unsuccessful bidders after award and to the winner when the performance guarantee is delivered. See bid bond and bid security.

Earnest money deposit

The cash version of bid security, common in India and neighbouring markets: a sum paid with the bid, by bank instrument or online transfer, refundable after award. Some buyers waive it for small or registered enterprises. See earnest money deposit and the India guide.

Performance bond (performance guarantee)

Provided by the winner after award. It secures the buyer against failure to perform the contract. It is usually a percentage of the contract value, often higher than a bid bond, and it stays in force until completion or the end of a defects period. Some buyers instead retain a portion of each payment as retention money. See performance bond, performance guarantee and retention money.

Advance payment guarantee

If the buyer pays part of the price before work starts, it will usually require a guarantee for that amount, reducing as the advance is recovered through later payments. See advance payment.

Warranty or defects guarantee

Covers the period after completion in which defects must be fixed. It is sometimes folded into retention money.

Forms: bank guarantee, surety bond, insurance bond, cash

• Bank guarantee. Issued by your bank, which commits to pay the buyer on its demand. The bank will normally require a counter-indemnity and may take a deposit or reduce your credit line.
• Surety or insurance bond. Issued by a surety company or insurer, which assesses your financial strength and charges a premium. In some markets surety bonds are common and often cheaper than tying up bank credit.
• Cash or cheque deposit. Accepted by some buyers; it ties up working capital directly.
• Retention. Withholding a percentage of progress payments as security for the contract.

The tender states which forms are accepted and often supplies a template. International guarantees sometimes follow standard rules for demand guarantees published by the International Chamber of Commerce (URDG 758); check what the buyer's documents specify.

Conditional or on-demand

An on-demand (unconditional) guarantee pays when the buyer claims, without proof that you defaulted. A conditional guarantee pays only on evidence of breach. Buyers usually require on-demand guarantees. Treat them as cash that may leave your account at the buyer's say: before you bid, be sure you understand the circumstances in which the buyer may call it, and avoid practices that give a buyer grounds, such as withdrawing a bid after bid opening.

What guarantees cost

Costs depend on your credit standing, the amount, the duration and the country. You may pay an issuance fee, an annual commission or premium, and tie up collateral. For a small firm the bigger cost is often the line of credit consumed, which can limit how many bids you can support at the same time. Ask your bank or a surety broker about limits and fees before you start bidding, not the week the tender closes.

Traps that lose bids

• Wrong form or wording. Many buyers disqualify bonds that depart from the template. Use their template, with exact amounts, beneficiary name and tender reference.
• Wrong amount or currency. A bond that is a rounding error short can be non-compliant.
• Validity too short. The guarantee must usually stay valid for the bid validity period plus a margin. If the evaluation is extended, you may be asked to extend the guarantee, and refusing can mean exclusion. Calendar the expiry.
• Unacceptable issuer. Some buyers accept only banks licensed locally, or banks on an approved list, or require a local bank to counter-guarantee. Confirm before your bank issues.
• Late delivery. If the original bond must arrive physically before the deadline, allow courier time, and check the rules on electronic copies.
• Not budgeting the cost into the price. Fees, interest and retention are real costs. See pricing strategy.
• Forgetting the return. Reclaim bid bonds after award; unreturned bonds keep consuming your credit line.

If you are a small business

Guarantees are one of the biggest barriers for small bidders. Some buyers reduce or waive bid security for small enterprises or low-value contracts; others accept retention in place of a bond. Ask in a clarification question if the documents do not say. Build a relationship with a bank or surety provider early, and keep your financial statements current, since issuers rely on them. See government tenders for small business and consider a joint venture with a partner who has stronger credit.

Checklist before you bid

1. Does the tender require bid security? What amount, form and issuer type?
2. What is the bid validity period, and when would the guarantee expire?
3. Can your bank or surety issue in time, in the buyer's template?
4. What credit line will it use, and what other bids does it support?
5. How is performance security provided, and what percentage?
6. Is there an advance payment, and does it need its own guarantee?
7. Have the costs been added to the price?

Add these checks to your routine along with the rest of the tender documents checklist, and to your bid/no-bid scorecard.