The Purpose of a Bid Guaranty

It is fairly typical, good business practice, and often required by the law, that public agencies advertising for bids on a public works project require all bidders to submit with their bid a bid guaranty.

Acceptable bid guaranties generally fall within the following three categories:

1. Bid bond: A bid bond is a guaranty from a bonding company or surety.
   
   
2. Cashier's check: A check written from the account of a bank or other financial institution after the bidder has given the bank the amount of the check.
   
   
3. Certified check: A check written from the account of the bidder that comes with a certification by a bank or financial institution that the bidder's account has, and will continue to have, sufficient funds to cover the amount of the check. In other words, it's guaranteed by the bank.
   

A bid guaranty serves a couple of key purposes:

• To pay the public agency in the event the bidder is awarded the project but fails to enter into a contract, and the agency needs to either award to the second lowest bidder at a higher cost or readvertise the project.
• To discourage frivolous bids from bidders who have no intention or ability to enter into the contract.