Bid Bonds are usually the first step in a bonded contract process. Each bidder for a contract must guarantee the price bid by posting a certified check or indemnity bond, which is forfeited if the contractor fails to enter into the contract awarded. Usually the amount forfeited is the difference between his bid and the next lowest bid. The charges for Bid Bonds are nominal so as to encourage contractors to use Bid Bonds rather than certified checks.
Bid Bonds guarantee that the contractor will enter into a contract at the amount bid. When he does this, the Bid Bond is released.
The Performance Contract Bond guarantees performance of the terms of a contract. It maybe for the construction of a building or road or it maybe a supply contract. It maybe a transportation contract or almost any kind of contract where one party might experience harm if the other party fails to perform.
The Performance Bond is largely the result of governmental and other public bodies which are required by law to award contracts for public work to the lowest responsible bidder. The requirement of a Performance Bond and the screening process which the surety must do, eliminates unqualified contractors before the bidding process begins.
Performance Bonds are also frequently required in the private sector, including residential construction. In most cases, the bond guarantees completion of the work and payment of all labor and material costs.