A tender may ask for a bid bond when you bid, and a performance guarantee once you win. Both are promises made to the client, issued by a bank or an insurer. Neither gives you any money to do the work. (In contracts, the client is often called the employer.)
What a bid bond is
A bid bond is a guarantee you hand in with your tender. A bank's own guide says it "Compensates the employer if you are awarded the contract but do not take it up so the employer can rerun the tender process. This is submitted with the tender documents".
A client running a tender wants serious bidders only. The bid bond shows that someone stands behind your offer. If you win and walk away, the client can claim on the bond, so it can run the tender again.
What a performance guarantee is
Once you win, the client may ask for a performance guarantee. The same bank guide says it compensates the client if you don't do the work as the contract says, and that it is "put in place before any work commences".
A guarantee is not funding
The same bank guide says a guarantee "replaces the need to provide other forms of security (such as a cash deposit)". It stands in for security. It is not cash for the job.
| Bid bond | Performance guarantee | Tender funding | |
|---|---|---|---|
| When | With your bid, before the award | Before work starts, once you have won | Once you have won and need to pay costs upfront |
| Who it protects | The client running the tender | The client who awarded the contract | You, by paying costs before the client pays |
| Do you get cash? | No | No | Yes, for suppliers, materials, stock and project costs |
| What it is | A guarantee | A guarantee | Funding repaid from the project proceeds |
| How it ends | Ask the issuer when it ends, and what happens if you lose | On the end date or event set in its wording | Repaid from the project proceeds |
Tender funding only starts once you have won, and usually wants the award letter or contract. It does not pay for the bid itself. A contractor who wins a big job may need both: a guarantee because the client asks for one, and tender funding or purchase order funding to pay for materials and labour before the first payment comes in.
Who issues them
Banks and short-term insurers both issue construction guarantees, including bid bonds and performance guarantees.
What to ask an issuer
- How much must it be for? For a bid bond, the tender documents should say.
- What will it cost? One bank says its "Fees are risk related" and charges commission every 6 months. Ask the issuer for the full cost in rand.
- What security do they want? Ask what the issuer wants from you before it will stand behind you.
- How long will it take to issue? Tender closing dates and the client's start date don't move, so ask early.
- Does the wording match the tender or contract? Send the issuer the requirements early, and read the wording: it decides when the client can call on the guarantee.
- When does it end? Get the end date, or the event that ends it, in writing.
If you are bidding on a tender now
Plan the money side before you bid, not after you win:
- Get the bid bond, if the tender asks for one.
- Work out what delivering the job will cost before the client's first payment, including any performance guarantee.
- Know where that money will come from. Tender funding usually wants the award letter or contract, so it can't be fully arranged until you win. You can still find out early what a funder is likely to ask for.
Where we fit
We are a broker. We don't lend, and we don't issue guarantees. Bid bonds and performance guarantees are not among the six funding types we cover, so ask a bank or insurer that issues them. Where we can help is the money to deliver a job you have won, through tender funding or purchase order funding.
Next step
If you have won a tender or contract and need money to deliver it, check your fit. It takes about 2 to 3 minutes and needs no documents to start.
Sources
- online.firstrand.co.za: : bid bond "Compensates the employer if you are awarded the contract but do not take it up so the employer can rerun the tender process
- guardrisk.co.za: : an SA insurer listing "Construction guarantees: Bid bond/guarantee ..