A tender bond is a surety company’s guarantee that a contractor submitting a bid on a construction project is serious about the offer and financially able to perform it. If the contractor wins the bid but refuses to sign the contract or post the required performance and payment bonds, the project owner can collect from the tender bond to cover the added cost of awarding the job to the next bidder. “Tender bond” and “bid bond” mean the same thing; the first term is more common in international contracting, and the second is standard in American construction and public procurement.
The Three Parties Behind the Bond
Every tender bond involves three parties. The contractor submitting the bid is the principal. The entity soliciting bids is the obligee, which on public work is typically a government agency. The surety is the bonding company that underwrites the guarantee and agrees to pay the obligee if the principal defaults on the bond’s terms.
The bond becomes active the moment the bid is submitted and stays in force through the entire evaluation and award period. It does two things for the obligee. First, it confirms the bidder won’t yank the bid before the owner decides. Second, it guarantees that a winning bidder will sign the contract and furnish the larger performance and payment bonds required to begin work. Without this mechanism, owners would spend enormous time evaluating bids from contractors who might never follow through.
When You’ll Need One
Federal Construction Contracts
The Miller Act requires performance and payment bonds on any federal construction contract exceeding $100,000.1Office of the Law Revision Counsel. 40 USC 3131 – Bonds of Contractors of Public Buildings or Works The Federal Acquisition Regulation ties bid bonds to that rule: a contracting officer cannot require a bid guarantee unless a performance or payment bond is also required.2Acquisition.GOV. 48 CFR Subpart 28.1 – Bonds and Other Financial Protections In practice, nearly every competitive federal construction contract above $100,000 will demand a bid bond as part of the bid package.
For federal work, the bid guarantee must equal at least 20 percent of the bid price, capped at $3 million.3Acquisition.GOV. 48 CFR 28.101-2 – Solicitation Provision or Contract Clause A contractor bidding $2 million on a federal renovation would need a bid bond with a penal sum of at least $400,000.
State and Local Projects
All 50 states have their own versions of the Miller Act, commonly called Little Miller Acts, requiring bonds on state-funded public construction. Thresholds and required bond amounts vary widely. Some states require bonds on contracts as low as $25,000; others set the bar at $100,000 or higher. A few require bonds at only 50 percent of the contract value rather than the full amount. If you bid on public work in multiple states, check each state’s specific requirements; assuming one state’s rules apply everywhere is a reliable way to get disqualified.
Private Projects
Private owners are not legally required to demand bid bonds, but many do on larger projects. When they require one, the penal sum is typically 5 to 10 percent of the bid price. The owner sets the terms in the solicitation documents, and the percentage reflects their judgment about how much financial exposure a defaulting bidder would create.
How the Penal Sum Works
The bond amount is called the penal sum, and it is the maximum the surety would owe the obligee if the principal defaults. Treat it as a ceiling on liability, not a price tag. The obligee specifies the required penal sum in the bid solicitation, either as a percentage of the bid price or as a fixed dollar figure.
On federal work, the floor is 20 percent of the bid.3Acquisition.GOV. 48 CFR 28.101-2 – Solicitation Provision or Contract Clause On private and state projects, 5 to 10 percent is more common. The penal sum directly limits what the obligee can recover. If you win a $5 million contract with a 10 percent bid bond and refuse to sign, the obligee can collect up to $500,000 from the surety, even if the actual cost of re-bidding is higher.
What a Tender Bond Costs
The part that surprises most contractors: bid bonds are often free, or close to it. If you have an established bonding line with a surety, the surety typically issues bid bonds at no charge, because its real profit comes from the performance and payment bonds it will write if you win. The bid bond is essentially a loss leader.
When a premium is charged, it’s nominal. Contractors without a long-standing surety relationship might pay a small flat fee or a fraction of a percent of the bond amount. Rates depend on your credit profile, financial health, and the surety’s read of your management. Contractors with credit scores above 700 generally qualify for the best rates, while those in the 600–699 range face higher premiums. Falling below 600 makes getting bonded at all significantly harder and more expensive.
The premium is entirely separate from the penal sum. You are not paying 20 percent of your bid price. The penal sum is the surety’s maximum exposure if you default, and the premium is a much smaller fee for taking on that risk.
How Sureties Decide Whether to Bond You
Before any surety will issue a tender bond, they need to be confident you can actually perform the work. Underwriting centers on what the industry calls the Three Cs: character, capacity, and capital.
- Character. Track record of honoring contracts, industry reputation, and whether your history includes lawsuits, bankruptcies, or unresolved disputes. A pattern of walking away from projects or fighting with subcontractors is a dealbreaker.
- Capacity. Your ability to perform the specific work. The surety reviews experience on similar projects, the strength of your management team, equipment resources, and current workload. A contractor whose largest jobs have been $500,000 is unlikely to get bonded for a $10 million project.
- Capital. Financial statements showing adequate working capital, healthy net worth, and stable profitability. Audited statements carry more weight than internally prepared ones, and most sureties require them above a certain bonding threshold.
This evaluation happens before you bid on any specific project. You establish a bonding relationship with a surety, often through a broker, and the surety sets your bonding line: the maximum total value of bonded work they’ll guarantee for you at any one time. Once that line is in place, getting a bid bond for a particular project is faster because the surety only needs to confirm the project fits within your capacity and remaining limit.
After You Submit the Bid
Once your bid is in, the tender bond sits quietly in the background while the obligee evaluates proposals. One of three things happens next.
Lose the bid, and the bond simply expires. The surety has no further obligation, your bonding capacity is freed up for other projects, and no money changes hands.
Win and follow through, and the tender bond is discharged the moment you sign the contract and deliver the required performance and payment bonds. Those subsequent bonds carry much higher penal sums, typically 100 percent of the contract price, with correspondingly higher premiums.
The third outcome is the one everyone wants to avoid.
What Happens If You Default
If you win the bid but refuse to sign the contract or fail to provide the required performance and payment bonds, you’ve defaulted. The obligee files a claim against the tender bond, and the financial consequences move fast.
The standard measure of damages is the difference between your bid and the next lowest responsible bid the obligee actually accepts. If you bid $1.2 million and the next accepted bidder came in at $1.35 million, the obligee’s damages are $150,000. The surety pays that amount, up to the penal sum. If the difference exceeds the penal sum, the obligee absorbs the remainder, which is why penal sums are set high enough to provide meaningful protection.
The surety’s payment does not end your exposure. Before your bonding line was established, you signed a General Agreement of Indemnity obligating you to reimburse the surety for any losses it pays on your behalf, plus legal fees, consulting costs, and related expenses. The surety will pursue you for every dollar. That indemnification obligation is the mechanism that keeps the bonding system honest: the surety fronts the money and comes after you to recover it.
Beyond the immediate financial hit, forfeiting a bid bond effectively ends your ability to get bonded in the future. Sureties share claims data, and no reputable surety wants to take on a contractor who has walked away from a bid. For anyone who depends on public work, that outcome is career-ending. The math on abandoning a low bid almost never works out in your favor once you factor in forfeiture, the indemnity claim, and the long-term damage to your bonding capacity.
Help for Small Contractors: The SBA Program
Small contractors who can’t get bonded on their own have a federal backstop. The SBA’s Surety Bond Guarantee Program partners with surety companies to guarantee bid, performance, and payment bonds for qualifying small businesses. The SBA guarantees bonds on contracts up to $9 million for non-federal projects and up to $14 million for federal contracts.4U.S. Small Business Administration. SBA Announces Statutory Increases for Surety Bond Guarantee Program On federal contracts above $9 million, the SBA can still guarantee bonds if a contracting officer provides a signed certification.
The SBA does not charge a fee for bid bond guarantees. For performance and payment bond guarantees, the fee is 0.6 percent of the contract price. To qualify, your business must meet SBA size standards, fall within the contract limits, and still pass the surety’s own evaluation of your credit, capacity, and character.5U.S. Small Business Administration. Surety Bonds The program is worth exploring if you’re a newer contractor trying to break into bonded public work, because it reduces the surety’s risk enough to bond contractors they might otherwise decline.