Understanding Bid Bond Costs
for California Contractors
Your Guide to Bid Bond Costs
Navigating the financial requirements for bidding on public projects in the California construction market requires expert guidance, especially when you are looking to scale. For many growing contractors, increasing bonding capacity is the primary objective to unlock larger, more profitable projects. This guide breaks down bid bond costs, requirements, and how to calculate what you’ll actually pay.
Why Would You Need a Bid Bond?
A bid bond serves as your “entry ticket” to the competitive bidding process. It provides project owners with a financial guarantee, to show that you are a serious bidder who will sign the contract and provide the necessary performance and payment bonds if selected.
You should request a bid bond as soon as you identify a project that requires bid security to ensure your submission is compliant and responsive. For a deeper look at this process, see our article on the function of a bid bond.
How Much Does a Bid Bond Cost in California?
One of the first questions we hear from contractors who are newer to bonding is, “How much do bid bonds cost?” Surety companies typically do not charge a premium for the bid bond itself. They’re in the same boat that the contractor is in. Similar to the contractor putting the time and effort into the bid without guarantee of winning the contract, the surety puts the time and effort into underwriting for the bid bond approval even though they might not have the opportunity to issue the performance and payment bonds.
The cost of bidding is an expected cost of doing business for contractors, and issuing bid bonds is an expected cost of doing business for surety companies. Sureties charge premium when the performance and payment bonds are issued. Like the contractor, the surety makes money when the contractor wins the job.
Who Pays for the Bid Bond?
While there isn’t a premium due for a bid bond, it’s important that the contractor factors the cost of the performance and payment bonds into their bid. The cost of the bonds should be included in the bid so that the owner of the project covers the payment.
Bond Premium Calculator
Use our free calculator to estimate your performance and payment bond premiums.
How to Calculate Bid Bond Amounts
To determine the bid bond amount, you must first understand the bid security requirement outlined by the owner (obligee) of the project you are bidding. The bid security amount, which is typically a percentage of the bid will be the “penal sum” of your bond. So, once you know how much you’re bid amount will be, you can calculate the amount of your bid bond. Learn more about how bid bonds are calculated.
Understanding the Penal Sum
The coverage value is called the penal sum and represents the maximum amount of damages the surety will pay out on a bid bond claim. The penal sum is calculated as a percentage of the total bid amount:
Penal Sum = Total Bid Amount x Percentage Required for Bid Security
What Does a 5% Bid Bond Mean?
If you see a solicitation requiring a “5% bid bond,” this means your bid security must cover 5% of your total bid price. For example, on a $2,000,000 bid, the bond amount would be $100,000.
In California, it’s common to see bid security requirements listed as 5%, 10%, 15%, or even 20% of the total bid amount.
It’s important for contractors to understand that although a bid bond is issued for only a small fraction of the contractor’s bid, the surety underwrites based on the full bid amount. This is because by issuing the bid bond, the surety is guaranteeing to the project owner or general contractor to provide the required performance and payment bonds.
Frequently Asked Questions
Since most sureties do not charge a premium for the bid bond itself, there is typically no refund involved. The bond simply expires or is released by the owner once the bid period ends or when the performance and payment bonds are issued. For more detail on how these instruments are handled under California and Federal law, see our article on understanding bid bond expirations.
How long is a bid bond good for? It’s important to refer to the bid specs to confirm how long a bid bond might be held, but generally anywhere from 60 to 120 days is common.
The primary risk is a bond claim. If you are the winning bidder but cannot provide the required performance and payment bonds, or you choose to not enter the contract, the surety may have to pay the obligee. Because of indemnity, you are responsible for reimbursing the surety. Learn more about what happens when a bid bond is called.
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