There are many different kinds of bonds; if you or your company regularly bid on projects as part of your day-to-day work activities, it is likely that you have come across bid bonds. This kind of bond exists between the owner—or person requesting bids—and you, the bidder or contractor. Typically, the bond covers anywhere from 5% to 20% of the amount bid.
When you bid on a contract, you are competing with other businesses to earn that contract; the lowest bidder is awarded the job. When an owner requires a bid bond, it is for two reasons: first, to prove that you are qualified by a third party bonding company to deliver what is required of you for the project. Having the ability to obtain a performance and payment bond in the event of being awarded the job instills faith in the owner that you are capable of performing as necessary. Second, it ensures that you as the bidder, should the owner select your company to do the work, cannot renegotiate the amount you have bid.
As part of the agreement between you and the bid bond company, you agree to forfeit the bond amount if you decide to back out of the deal. Therefore, should the owner select your bid, but for whatever reason you are not able or willing to commit to the terms you initially agreed to, the owner will then call the bond. The amount being called will cover the difference between your bid and the amount of the next lowest bidder.