The Bid Security and Its Purpose

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A bid security is an amount of money that may be calculated as a percentage
of the budget estimate of a procurement requirement or a percentage of a
bidder’s bid price. It is used by the client as protection against bidders
withdrawing their bids prior to the end of their bid validity period, or for
refusing to sign the contract.

The bid security is intended to deter bidders from withdrawing their bids
because they would otherwise forfeit the bid security amount to the client. It
gives the client some assurance that the selected bidder will sign the contract
or otherwise forfeit their bid security.

A bid security may be required of firms that submit offers in response to an

invitation for bids. It is commonly used when procuring goods, works, and
non-consultant services. Although uncommon for consultant services, it could
be applied if stipulated in the bidding documents and in the public
procurement rules.

As previously mentioned, the bid security amount can be set either as a

percentage of the bidder’s offer or as a percentage of the allocated budget for
the procurement requirement. However, if the procurement method used does
not permit revealing the allocated budget, care must be taken to set the bid
security as a fixed amount or as a percentage of the bidders’ bid rather than
as a percentage of the allocated budget. This would preclude indirectly or
inadvertently revealing the budget by setting the bid security amount as a
percentage of the estimated budget for the procurement requirement.

A bid security guarantee is usually acceptable in one of the following formats:

(i) unconditional bank guarantee, (ii) irrevocable letter of credit, (iii) certified
check, or (iv) bond.

The bid security must be surrendered to the client if the bidder: (i) withdraws
their bid before the end of the bid validity period, (ii) fails to sign the contract
after the notification of award, or (iii) fails to provide a performance security, if
required.