Bid bonds, performance bonds and letters of credit explained

If you have ever seen the phrase "bid security required" on a tender and felt your stomach drop, you are not alone. Bid bonds, performance bonds and letters of credit sound like banking jargon, but they are really just ways for a buyer to make sure you will do what you promised. Once you understand how each one works, they stop being scary and start being just another line item to plan for.

This guide breaks down what each type of security is, when buyers ask for it, roughly what it costs, and how to get set up before you need one in a hurry.

Why buyers ask for security at all

Government buyers spend public money, so they need proof that a bidder is serious and financially capable. Bid security is money or a guarantee you put up alongside your bid, showing you will sign the contract if you win. Without it, a buyer could pick a winner who then walks away, forcing a costly re-tender.

Security also protects the buyer if something goes wrong after the contract starts — a job left unfinished, a supplier that goes bankrupt, or work that does not meet the required standard. It is not a punishment aimed at small businesses. It is a standard risk-management tool used across almost every trade agreement threshold, from municipal paving contracts to large federal IT projects. You can learn more about those thresholds in our guide to trade agreement thresholds under WTO-AGP, CFTA and CUSMA.

Bid bonds: your promise to honour the price you quoted

A bid bond is a guarantee, usually issued by a surety company (a firm that specialises in these guarantees, a bit like an insurer), that you will sign the contract and provide any other required bonds if you are awarded the work. If you win and then refuse to proceed, the buyer can claim against the bond, and you may be barred from bidding again.

Bid bonds are common on construction and infrastructure tenders, and less common on smaller professional-services contracts. The typical amount is a percentage of your bid price, often between 5% and 10%, though the exact figure is always stated in the tender documents.

Key things to know about bid bonds:

• They cost little upfront. A surety usually charges a small fee (sometimes under 1% to 2% of the bond amount) rather than tying up your full cash. This is different from cash security, which locks up real money.
• You need a track record or collateral to get approved. Surety companies assess your financial statements, credit history and past project performance before agreeing to bond you.
• A bid bond is not a performance bond. It only covers the period between bid submission and contract signing. Once you sign, you may need a separate performance bond.

If your business has no bonding history yet, start the conversation with a broker early — long before you need your first bond for a real bid. Our guide on setting up bonding and insurance before your first public bid walks through the process step by step.

Performance bonds: guaranteeing the work gets done

A performance bond guarantees that you will complete the contract according to its terms. If you default — for example, you go out of business mid-project or fail to meet the agreed standard — the surety steps in to cover the cost of finishing the work, often by paying another contractor to complete it.

Performance bonds are almost always required on construction, major repair, and infrastructure contracts. They are less common in professional services or simple goods purchases, where a warranty or holdback might do the same job instead.

A few practical points:

• The bond usually stays in place for the whole contract term, not just until the work starts. Some contracts also require a maintenance bond or labour and material payment bond covering a defined period after completion, to guarantee subcontractors and suppliers get paid.
• The amount is typically 50% to 100% of the contract value for construction work, which is much higher than a bid bond because the risk being covered is much bigger.
• Sureties look at your capacity, not just your credit. They will ask whether you have the equipment, staff and experience to actually deliver a project of that size. This is one reason building a solid past-performance portfolio when you have no government contracts yet matters even before you chase big-ticket work.

Letters of credit: the bank-backed alternative

A letter of credit (LC), sometimes called an irrevocable standby letter of credit, is a guarantee from your bank rather than a surety company. The bank promises to pay the buyer a set amount if you fail to meet your obligations. Some tenders let you choose between a bond and a letter of credit; others specify one or the other.

The big practical difference is how each one affects your cash and credit:

• A letter of credit usually ties up your line of credit or requires cash collateral at the bank for the full guaranteed amount, for as long as the LC is outstanding.
• A bond from a surety does not tie up your operating credit the same way, because the surety is taking on the risk in exchange for a premium, not locking your money away.
• Letters of credit can sometimes be arranged faster if you already have a strong banking relationship, which matters when a deadline is close.

For a small business juggling payroll, inventory and other working-capital needs, a letter of credit can quietly squeeze your cash flow more than a bond would. It is worth discussing both options with your bank and a bonding broker before you commit to a bidding strategy that depends on one or the other.

How the three compare

Security type	Who issues it	What it covers	Typical cost impact	Ties up your cash?
Bid bond	Surety company	Signing the contract if you win	Small fee (often under 2% of bond value)	No
Performance bond	Surety company	Completing the contract to spec	Fee based on contract size and your risk profile	No, but affects your bonding capacity/limit
Letter of credit	Your bank	Any default named in the tender	Interest or fees, plus collateral requirement	Yes — reduces available credit or cash

What happens if you cannot get bonded

Not being able to secure a bid bond or performance bond is one of the most common reasons small and newer businesses walk away from otherwise winnable tenders. If this is you, you have options.

• Ask your bonding broker about a graduated program. Many sureties will start a new business with a lower bonding limit and increase it as you complete contracts successfully.
• Consider teaming up. A joint venture with a more established partner can combine bonding capacity. See our explainer on joint ventures and subcontracting on government contracts for what is allowed.
• Look at the Small Business Procurement Program. As Canada rolls out proportional requirements through 2026, some contracts are being scaled so that bonding and other requirements better match the size of the job rather than defaulting to large-project norms. Read more in our guide on qualifying for the federal Small Business Procurement stream.
• Start smaller. Building a track record on lower-value contracts, including provincial and municipal work found through live tender search, makes it easier to grow your bonding capacity over time.

Common mistakes that trip up first-time bidders

A few errors show up again and again in bid security, and most are easy to avoid once you know what to watch for.

• Submitting the wrong form of security. Tenders often specify exactly what is acceptable — a certified cheque, a bond in a specific format, or an LC from a Canadian bank. Substituting one for another, even a "better" one, can make your bid non-compliant. This ties directly into the broader topic of mandatory versus rated requirements, where getting a mandatory item wrong disqualifies you outright.
• Leaving bonding until the last minute. Sureties need time to underwrite, especially for a new client or a large contract. Waiting until a week before the deadline is a common way to miss it entirely.
• Not reading the expiry and renewal terms. Bid bonds have a validity period, and if the award process runs long, you may need to extend it. Missing this can knock you out of contention even after doing everything else right.
• Forgetting security ties to pricing. The cost of a bond or LC is a real expense that belongs in your bid price. Our guide on pricing a government bid without leaving money on the table covers how to build this into your numbers properly.

Where this fits in the bigger picture

Bid security is just one compliance requirement among several. Buyers will also check your registration status, insurance, and sometimes your Canadian-content or supply-chain profile, especially as reciprocal procurement rules and Buy Canadian requirements phase in through 2026. If you have not already, make sure your supplier profile is in order — our step-by-step guide on registering as a supplier on CanadaBuys is a good starting point, and you can browse current opportunities by sector and province through opportunity landing pages or review a buyer's history through buyer and agency profiles before you commit resources to a bid.

Getting your bonding relationships sorted before you need them is one of the simplest ways to bid with confidence. A phone call to a broker today can save you from losing a strong opportunity to a paperwork deadline next month — and once the groundwork is done, it becomes routine rather than a scramble every time a good tender lands.