Tender Bond (Bid Bond)

A tender bond is a form of security required by some contracting authorities as a condition of submitting a bid. It guarantees that if a supplier wins a contract, it will not simply walk away from the award. The bond provides the buyer with a financial remedy in the event the successful tenderer refuses to enter into the contract or fails to furnish any follow-on security such as a performance bond.

What is a Tender Bond (Bid Bond)?

A tender bond is typically expressed as a percentage of the estimated contract value, commonly between 1% and 5%. It can take several forms: a conditional bank guarantee, a letter of credit, or an insurance-backed instrument issued by a surety. The bond remains in force throughout the validity period of the tender, which is the period during which the contracting authority may formally accept the offer.

Under European public procurement law, Directive 2014/24/EU does not mandate tender bonds for all procedures, but it does not prohibit contracting authorities from requiring them. Their use is discretionary and depends on the nature and value of the contract. In practice, tender bonds appear most frequently in large construction and infrastructure projects in Central and Eastern European member states, parts of Southern Europe, and in some UK local authority procurements. In Norway, Switzerland, and Ukraine, tender bonds are also permitted under equivalent national frameworks aligned to European norms.

The bond is typically released automatically to unsuccessful tenderers once the contract is awarded, and to the successful tenderer once the required performance bond or contract security is in place. If the successful bidder defaults, the contracting authority makes a call on the bond, and the issuing bank or surety pays out the guaranteed amount.

Where a bank guarantee (procurement) is used as the instrument, the bank issues an unconditional undertaking to pay on first demand, without requiring the buyer to prove loss. This makes it fast and commercially effective for the contracting authority, but it shifts risk significantly onto the supplier.

Why it matters for bidders

Obtaining a tender bond has a cost: typically a fee of 0.1% to 0.5% of the bond value per annum, plus arrangement costs. Bidders should factor this into their bid preparation budget, particularly on large contracts where the absolute fee can be substantial. Failure to submit a valid tender bond where one is required results in automatic disqualification, regardless of how competitive the price or how strong the technical proposal.

Suppliers should also check the bond's validity period carefully. If tender evaluations run long, the contracting authority may request an extension of the bond; failure to extend results in disqualification.

Example

A Romanian public works authority issues a tender for a road rehabilitation project worth EUR 8 million and requires a tender bond equal to 2% of the estimated contract value, meaning EUR 160,000. A bidder obtains an unconditional bank guarantee from its house bank and submits it with its tender. The bond is valid for 120 days, matching the tender validity period. The bidder wins the contract, furnishes a performance bond within the stipulated 10 days, and the tender bond is released.

Frequently Asked Questions

Is a tender bond the same as a bid security?

The terms are used interchangeably in practice. "Bid bond" and "tender bond" both refer to the security submitted with a tender to guarantee the bidder's commitment. "Bid security" is the broader functional term, while "bond" implies a specific instrument issued by a bank or surety. The underlying commercial purpose is identical.

Can a contracting authority call the bond if it simply changes its mind about awarding the contract?

No. A tender bond can only be called if the successful tenderer defaults, for example by refusing to sign the contract or failing to provide the required follow-on security within the stipulated timeframe. If the contracting authority cancels the procurement for legitimate procurement reasons, the bond must be released. An improper call may be challenged as unjust enrichment.

What happens if my bank cannot issue the bond in time?

Late submission of a required tender bond is treated as a non-compliant bid in most jurisdictions and results in disqualification. Suppliers should initiate the bond application well before the submission deadline, as banks may take several days to process and issue the instrument. Using a specialist surety can sometimes reduce lead times.