Bid Bonds and Performance Bonds: What Small Businesses Need to Know
- ellis434
- Jun 19
- 4 min read
When responding to an RFP—especially in government, municipal, or large commercial contracts—two terms often surface that can quickly become roadblocks for small businesses: bid bonds and performance bonds. These aren’t just paperwork. They’re powerful financial instruments that can determine whether you win a contract or even qualify to submit a bid in the first place.
What Is a Bid Bond?
A bid bond is a type of surety bond that guarantees the bidder (you) will honor the terms of your proposal and enter into a contract if awarded. It protects the project owner by ensuring that bidders are serious and financially capable. If the winning bidder backs out or can't meet the contract terms, the bid bond compensates the project owner, usually up to a defined percentage of the bid amount.
What Is a Performance Bond?
Once you win a contract, a performance bond comes into play. This bond guarantees that you'll complete the project according to the agreed terms, timeline, and quality standards. If you default, the bond ensures the project owner gets financial compensation or another contractor to complete the job, without additional cost to them.
Why Do Entities Require These Bonds?
Bid and performance bonds provide risk protection. For public agencies and large private-sector clients, these bonds ensure they aren't left exposed to loss due to non-performance, abandoned projects, or financial instability on the part of the contractor. It’s a layer of accountability—and it’s become a standard in competitive bidding environments.
Always Verify If Bonds Are Actually Required
This step is too often overlooked: Before you rush to secure a bid bond or bake in the cost of a performance bond, make sure it’s truly required.
Sometimes, RFP documents include boilerplate language from older templates, and bonding may no longer be necessary for that particular project. At other times, bid instructions conflict with the actual contract terms. The best approach? Ask the issuing agency or procurement officer directly. Clarifying this early saves time, avoids unnecessary cost, and ensures your proposal aligns with actual expectations, not outdated assumptions.
The Challenge for Small Businesses
Here’s the rub: securing these bonds isn’t always easy for small businesses. You’re often required to submit detailed financial statements, demonstrate strong creditworthiness, and show a history of successful project execution. This can be tough if you're just getting started or don’t have an extensive bonding history.
Another hurdle is bonding capacity—the maximum amount of bonded work you can carry at one time. Bonding capacity is based on a combination of working capital, net worth, and past performance. Many small firms find themselves hitting their limit before they even grow into mid-sized players.
How to Position Your Business for Bonding
Getting ahead of bonding challenges starts with preparation:
Build strong financials. Keep clean, up-to-date financial statements. Work with a CPA who understands construction or government contracting.
Establish a relationship with a surety agent as early as possible. Don’t wait for an RFP to drop. Choose an experienced bond agent or firm that regularly works with small and emerging businesses.
Start small. Work on smaller bonded projects to establish a track record that will support larger bonding needs in the future.
Improve your credit. Both personal and business credit scores matter to bonding underwriters.
Organize your documentation. Be ready to submit a work-in-progress schedule, business plan, resumes, references, and tax returns.
Don’t Forget to Include Bond Costs in Your Proposal
One of the most commonly overlooked details is the cost of the performance bond. This isn’t free—it typically runs 0.5% to 3% of the total contract value, depending on the risk and size of the project. Failing to incorporate this into your pricing can directly eat into your profit margin or render your bid unsustainable.
The same applies to bid bonds, though these are often issued at little or no upfront cost if you have an established surety relationship. Still, always confirm the terms and account for any potential cost.
Choose the Right Bonding Partner
Not all bonding firms are the same. When selecting a partner, look for:
Experience with small and growing businesses
Willingness to coach and educate, not just process paperwork
Responsiveness to tight RFP deadlines
Strong relationships with top-tier surety providers
Transparency in pricing and supportive underwriting
The right firm doesn’t just issue bonds—they help you grow into bigger projects, increase your bonding capacity, and compete with confidence.
Final Thought
At ECB Solutions, we’ve seen how bonding requirements can either be a barrier—or a stepping stone—for small businesses. With the right preparation, awareness, and support team, you can make sure it’s the latter.
Clarify whether a bond is even required.
Plan early to secure bonding.
Include the cost in your proposal.
Build a relationship with the right surety agent.
Bonding shouldn’t be a last-minute scramble—it should be part of your bidding strategy from day one.
Ellis Bledose, Principal Owner - ECB Solutions, LLC
