Bid security: Overview, definition, and example
What is bid security?
Bid security is a deposit or guarantee required from a bidder when submitting a bid for a contract, particularly in construction or procurement processes. The purpose of bid security is to ensure that the bidder is serious and committed to the terms of the proposal. If the bidder withdraws their bid or fails to sign the contract if awarded, the bid security may be forfeited as compensation for the time and effort spent evaluating the bid. Bid security can be provided in the form of a cash deposit, a bond, or a letter of credit.
In simpler terms, bid security is a way to ensure that a bidder is committed to their offer, and it protects the entity requesting the bids from losing time and resources if the bidder backs out.
Why is bid security important?
Bid security is important because it helps prevent frivolous or non-serious bids and ensures that the bidder follows through with their offer. It protects the party requesting the bid from wasting resources on evaluating bids that may not result in an actual contract or deal. Bid security also helps maintain fairness and competition in the bidding process, ensuring that only legitimate bidders participate.
For SMB owners or businesses involved in bidding processes, understanding the role of bid security is crucial to ensure that your bid is taken seriously and to avoid any potential complications or loss of time.
Understanding bid security through an example
Let’s say your company is bidding on a government construction project. As part of the bidding process, you are required to submit bid security of 5% of your total bid amount. This means if you bid $1,000,000 for the project, you would need to provide $50,000 in bid security. If your bid is accepted and you refuse to sign the contract, or if you fail to follow through with the terms, the government may keep the $50,000 as compensation for the time and costs involved in evaluating your bid.
In this case, bid security ensures that your company is serious about following through on the project if awarded the contract.
Example of a bid security clause
Here’s an example of what a bid security clause might look like in a contract or bidding document:
“Each bidder must submit bid security in the form of a certified check, bank guarantee, or surety bond, in the amount of [X%] of the total bid value, to ensure the bidder’s commitment to the bid. The bid security shall be forfeited if the bidder withdraws their bid after the submission deadline or fails to execute the contract upon award.”
Conclusion
Bid security serves as a safeguard in the bidding process, ensuring that bidders are committed and that the entity requesting the bids is protected from time and resource losses. For SMB owners participating in bidding, understanding the requirements for bid security helps you prepare and ensures that your bid is viewed as serious and competitive. By providing bid security, businesses can strengthen their credibility and increase their chances of winning contracts.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.