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Last edited 29 Oct 2020
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.
NB the UN Procurement Practitioner's Handbook, produced by the Interagency Procurement Working Group (IAPWG) in 2006 and updated in 2012, defines a bid bond or bid security as: 'A security from a supplier securing obligations resulting from a contract award with the intention to avoid: the withdrawal or modification of an offer after the deadline for submission of such documents; failure to sign the contract or failure to provide the required security for the performance of the contract after an offer has been accepted; or failure to comply with any other condition precedent to signing the contract specified in the solicitation documents.'
Capital Works Management Framework, Guidance Note, Glossary, Published by the Government of Ireland Department of Finance in 2009 suggests that: ‘A bid bond is effectively a contract of guarantee whereby the guarantor or surety (authorised to do guarantee business) undertakes to pay damages to a second party, in this case the Employer, when the Contractor does not honour his tender. In essence, the guarantor undertakes to be answerable for losses suffered by the Employer if the Contractor withdraws following a bid. The Employer does not need to prove loss before calling in this bond. When a bond is called in, the Employer has a guarantee that funds up to the amount of the bond will be available to defray the Employer’s losses resulting from the Contractor’s default.’
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