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These Bonds are also known as tender bonds and can be classified into three categories:
Bid Bonds with no financial obligation (for Contractors)
These bonds are normally issued for tenders, where the only obligation is a “Promisory Note” to the effect that in case the tenderer wins the tender, we will issue a Performance Bond.
The risk is minimal with these types of Bonds as there is no financial obligation involved, and the tenderer if successful may even take a performance bond from any other company.
Bid Bonds which have an element of a Guarantee
In such bonds, a bond amount is stated and this amount is normally a percentage of the tender amount. This amount is normally assumed to be the cost, which would be incurred by the principal for calling for new tenders.
Bid Bonds used to tender for supply of goods
Organisations which want to buy goods often call for tender for supply of such goods from interested suppliers.
Often, one condition on such tenders is that a bid or tender bond should be provided with along with the tender documents.
The common conditions in such tenders are that the tender should be valid for a certain time period (i.e. 30 days, 60 days, etc), the tender will not be withdrawn before the expiry of the time period or if awarded the tender, a supply or performance bond will be supplied. There may also be different conditions on different types of tender documents.
Bid bonds normally have a period during which the bid is valid and in the event the insured is not awarded the tender, the bid bond lapses.