When a contractor, or the 'principal', is bidding on a tendered contract with public authorities or private owners, a Bid Bond is purchased.

The Bid Bond pre-qualifies the principal and provides the owner or general contractor with the necessary security, requiring a guarantee that the principal will enter into the contract if it is awarded. In essence, it ensures that, if the contract is awarded, the Bidder (Constructor) will enter into the said agreement and provide the required Performance Bond.

If the winning contractor fails to execute the contract or provide the required performance and/or payment bonds, the cash deposit will be forfeited in full or in part.