Bonds are a means of protection against the non-performance of supplier. They are an undertaking by a bondsman or surety to make a payment to the client in the event of non-performance of the supplier. The cost of the bond is usually borne by the supplier, albeit, this is likely to be reflected in their tender price.
Bid bonds, also known as tender bonds, are rare in the UK, but can be a requirement of an international tender process. They are usually on-demand bonds submitted with a tender to secure the tender's commitment to commence the contract. The bond is partially or fully forfeited if the winning tenderer fails to execute the contract or meet other specified conditions.
If the bond is partially or fully forfeited, the principal (typically the contractor) and the surety are jointly and severally liable for the bond, which includes any additional costs the client incurs in selecting and awarding another supplier. Often this is the difference between the lowest bid and the second-lowest bid.
However, there is the disadvantage that bid bonds can be open to abuse by the client and they may prevent smaller companies from tendering. Internationally, there have been cases of bonds 'disappearing' along with the client.
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