Tender Bond
A tender bond, also called a bid bond in some jurisdictions, is a financial guarantee that a bidder submits with their tender to demonstrate their commitment to honour the bid if selected. The bond is forfeited to the contracting authority if the bidder withdraws their bid before the award decision or refuses to enter into the contract after winning. Tender bonds protect buyers from suppliers who submit bids without serious intent, gaming the procurement process, or backing out when commercial conditions change.
A tender bond, also called a bid bond in some jurisdictions, is a financial guarantee that a bidder submits with their tender to demonstrate their commitment to honour the bid if selected. The bond is forfeited to the contracting authority if the bidder withdraws their bid before the award decision or refuses to enter into the contract after winning. Tender bonds protect buyers from suppliers who submit bids without serious intent, gaming the procurement process, or backing out when commercial conditions change.
How tender bonds work
When a tender requires a bond, bidders submit the bond alongside their tender documents at the submission deadline. The bond is typically issued by a bank or insurance company on behalf of the bidder. The bond document confirms that the issuer will pay a specified amount to the contracting authority if certain trigger events occur, such as the bidder withdrawing their tender or refusing to sign the contract after award.
The bond amount is usually expressed as a percentage of the bid price, often between two and five percent. For high-value contracts, the bond amount can run to tens or hundreds of thousands of euros. Bidders carry the cost of the bond, which is paid to the issuing bank or insurer. The cost is typically a small percentage of the bond amount per year and is treated as a bid preparation cost that the bidder absorbs whether they win or lose.
Once the procurement is complete and the contract is signed with the winning bidder, tender bonds are released back to all bidders. The winning bidder may need to replace the tender bond with a performance bond covering contract delivery, depending on the contract terms. Unsuccessful bidders receive their bonds back automatically once the standstill period ends and the contract is signed.
When tender bonds are required
Tender bonds are most common in construction, infrastructure, and other capital-intensive contracts where the buyer wants strong assurance of bidder commitment. The financial commitment represented by the bond filters out frivolous bidders and ensures that only serious participants engage in the procurement. This filtering is particularly valuable for complex tenders where the buyer's evaluation effort is substantial.
Tender bonds are less common in services contracts and consulting engagements, where withdrawal risk is lower and the cost of replacement bidders is less severe. Many small consulting contracts have no bond requirement at all, relying instead on the bidder's reputational interest in honouring their bids. The decision to require a tender bond depends on contract value, supplier market characteristics, and the buyer's risk tolerance.
In some jurisdictions and sectors, tender bonds are mandated by procurement law for contracts above defined value thresholds. The European Union directives do not mandate tender bonds, leaving the decision to national rules and individual buyers. Some EU member states have specific requirements for public works contracts or for procurements above certain values. Bidders need to understand the rules in each jurisdiction and contract type they pursue.
Practical considerations for bidders
Securing a tender bond requires advance planning. Bidders need to maintain relationships with banks or insurance companies that can issue bonds, and they need credit facilities or collateral arrangements to support bond issuance. New bidders sometimes face difficulty obtaining bonds for their first major tenders because they lack the credit history that bond issuers prefer.
The cost of bonds is generally modest as a percentage of contract value, but it accumulates across multiple bids. A supplier active in tender bond markets pays bond fees on every bid, whether they win or lose. Sophisticated bidders factor bond costs into their bid pricing and into their overall bid economics. Bidders who pursue many bonds without winning enough contracts to offset the costs face accumulating expense.
Common issues with tender bonds
- Late submission of bonds, where the bond document arrives after the tender deadline, often resulting in disqualification.
- Wrong bond format or wording, where the bond document does not match the buyer's required template.
- Insufficient bond amount, where the bond is for less than the buyer's specified percentage of bid price.
- Bond expiration before the contract is signed, requiring extensions that bidders may have to negotiate with their issuers.
- Disputes over whether bond forfeiture conditions have been met, particularly when a bidder withdraws for reasons they consider justified.
Related terms
- Performance Bond: the bond covering contract delivery after award.
- Bid Bond: another term for tender bond, common in US procurement.
- Bid: the offer the bond accompanies.
- Tender: the broader document framework including bonds.
- Standstill Period: the post-award period before bonds are released.
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