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 lien.
Thank you very much Jorge, for so long i had never clearly appreciated the need and value of a bid security. Now that i know i will also share with others.
Qtn. What is it that we use to safeguard against loss in case of construction before the expiry of the defects liability period?
Appreciate your feedback Taddeo, thanks.
Regarding your question on the defects liability period, please see recent post on Defects Liability (click here).
Thanks Mr. Jorge,
It’s great to read this as an aspiring procurement practitioner. It’s important to bear this in my mind, and as I execute my procurement obligations, I should know what to do. Mr. Jorge please notice that am doing procurement on a voluntary basis at one of our local government districts in Uganda. Much as am not paid, this is helping me to get exposed to the profession and acquire practical experience. I have read and admired these articles, including the mighty “PROCUREMENT CLASSROOM” God bless.
Ronald, Thanks for the comment. It’s good to know that you are doing voluntary work in Uganda. That is good because you are getting valuable experience even if you are not being paid for it. Feel free to contact me by email if need be.
Is it the responsibility of procurement officers to prepare Local Purchase Orders (LPOs) or it is the work of the accounts?
That would depend on the procurement rules; however, in most cases it’s done by the Procuring Entity.
Hope this helps.
Dear Ahmed,
Good question.
Please understand that a Local Purchase Order is simply a contract that does not stipulate, require or include too much detail. For example: General and specific conditions of contract.
There should be segregation of duties and responsibilities.
The role of Accounts is to make timely payments to the suppliers in this regard, among others things.
Hope this sheds some light.
Agreed Taddeo. Thanks
Dear friends,
I am a practicing procurement staff at the Department of Youth & Sports in my country Liberia.
I initially started this profession with absolutely no idea. Later I was fortunate to attend a World Bank sponsored program at the Liberia Institute of Public Administration (LIPA) for six week. Since then, I have become an asset to my unit and if don’t get to work on time, I receive lots of calls.
As I write, I am currently undergoing almost three months training with a World Bank expert. so my question is, can I earn a PhD in this profession that I so admire? Is it possible to do this?
Thanks.
Matthew,
I’m happy to know that you are so passionate about procurement.
I’m sure it’s possible to obtain a PhD in this field. The universities of Cranfield and Nottingham offer relevant programs.
Good luck!
Dear jorge,
I really enjoyed reading your article. May I please know if it is right to disqulify bidders if the bid security form is in different format to that provided in the tender document or it is missing but the bidder is willing to submit the same.
Thank you
Michael,
Your question is an interesting one. It really depends on responsiveness. If in the bidding documents it was stated that a bidder’s bid would be rejected if they failed to submit the bid security or if the bid security guarantee was submitted in a format different from that stated in the bidding document, then I would say yes, the bidder’s bid would have to be rejected if the form is different or the bid security is missing even if the bidder is willing to submit as indicated.
Bidders should be careful with their submissions to comply with the bidding documents in order to be considered responsive. But, if the word “may” was used in the bidding document in reference to the bid security and form, in the sense that the statement could have been to the effect that “bidders who fail to submit the bid security in the format indicated may be rejected as non-responsive”, then the approving authority could permit the bidder to submit the correct bid security or the bid security itself because the word “may” is discretionary, whereas the work “shall or will” are absolute.
Hope this helps and thanks for visiting The Procurement ClassRoom.
Dear Jorge,
What risk does a bank take on issuing a bid security on behalf of a contractor/supplier? Are there any financial implications to the Bank for issuing a bid security?
Good question Ken!
In reality, there should be no risk to the bank. Depending on the relationship they have with the contractor, it seems to me they would protect themselves by demanding some form of guarantee in the event the contractor has to forfeit the bid security.
Hi Jorge,
What is the difference between a performance guarantee and a bid security?
I am a procurement practitioner from Uganda.
A good question Ayany…
There is a clear distinction between the performance guarantee and the bid security. First let’s talk about the bid security because it comes first in the procurement process.
A bid security is a form of monetary guarantee the purchaser or client requires from a bidder or tenderer to safeguard against the withdrawal of their bid before the end of the bid validity period, or their refusal to sign the contract if selected. In both cases, the purchaser or client would have the right to keep the bid security amount.
The bid security, when requested, is submitted with the bid or tender in the amount and form of guarantee stipulated in the tender documents. And it is usually requested for goods and works procurement, but seldom for consultant services procurement.
The performance guarantee, on the other hand, is required prior to contract implementation and is commonly used for works procurement, but to a lesser extent for goods and consultancy services procurement unless they are of high monetary value and complexity.
The performance guarantee is also a monetary assurance that is either put forward by the contractor before the contract is signed, or is retained from progress payments to the contractor up to a stipulated amount which is usually about 10% of the contract value.
A performance guarantee is required whenever the tender documents clearly stipulate the need for bidders to provide a performance security that may be forfeited to the client under specific conditions of unsatisfactory performance.
To summarize, the bid security is to secure the bid and the signing of the contract, and the performance guarantee is to secure satisfactory performance after the contract is signed.
See also: bid security and performance security, here: https://procurementclassroom.mystagingwebsite.com/definition-of-terms/
Hope this helps and thanks for visiting The Procurement ClassRoom
Dear Mr Jorge
Please, What is the difference between Tenderer and Bidder
They are essentially the same…
Can you explain what are the consequences of not awarding the contract within the bid security period? can thee Employer request to extend the bid security.
Thank you.
Please read: https://procurementclassroom.mystagingwebsite.com/understanding-bid-validity-and-the-bid-validity-period/