Bid Bonds, Performance Bonds & More: Everything you need to know

Introduction

Infrastructure is booming in India — from highways to metro rail, data centres to smart cities. But before a single brick is laid, project owners need a guarantee that contractors will perform their obligations without risking public funds.

Enter: Surety Bonds — a trusted alternative to bank guarantees that secures performance while freeing up working capital for businesses.

But not all surety bonds are the same. Each serves a distinct purpose at different stages of a project. In this blog, we break down the main types of surety bonds in India and how they work.

What is a Surety Bond?

A surety bond is a three-party guarantee ensuring contractual obligations are fulfilled:

Role	Entity	Responsibility
Principal	Contractor	Executes the project
Obligee	Project owner / Government authority	Protected from losses
Surety	Insurance company	Guarantees performance & compensates if default occurs

If the contractor fails, the surety steps in—either completing the work or paying for the damage.

Types of Surety Bonds in India

1. Bid Bonds

A Bid Bond is submitted while applying for a tender. It ensures the contractor’s bid is genuine and financially backed.

How it protects:If the contract is awarded and the contractor backs out, refuses to honour quoted pricing, or doesn’t produce a Performance Bond in time, the project owner is compensated for losses and re-tendering delays.

Ideal for: Government tenders (EPC, railways, metros, road construction)

Key Benefit: Prevents irresponsible bidding and ensures only serious, capable contractors participate.

2. Performance Bonds

Once a contractor wins a project, the Performance Bond takes over. It legally guarantees that the contractor will:

• Deliver the project as per schedule

• Maintain agreed specifications and safety standards

• Meet legal and contractual requirements

If they fail, the surety can arrange alternative contractors or pay the cost of completing the project.

Common in: large infrastructure (bridges, tunnels, airports), defence contracts, utilities, renewable energy parks

Key Benefit: Project owners get assured performance, not just financial recovery.

3. Advance Payment Bonds

Government agencies often release mobilisation advances to help contractors start procurement and planning. This bond ensures:

• Advance funds are used strictly for project needs

• Misappropriation is fully recoverable

If funds are misused or work does not progress, the surety compensates the project owner.

Key Benefit: Contractors get liquidity support without additional collateral, while owners retain security.

4. Retention Money Bonds

Traditionally, project owners retain 5–10% of every bill to cover workmanship defects found later.With a Retention Bond:

• Contractors receive full payments

• Defect liability remains protected

This strengthens working capital and accelerates construction without compromising risk coverage.

Key Benefit: Improves cashflow for contractors — crucial for MSMEs.

5. Supply Bonds

Critical infrastructure relies on a timely supply of materials and equipment. A supply bond guarantees that the supplier will:

• Deliver on time

• Meet quality and compliance specifications

• Maintain consistency in supplying high-value or critical items

If a supplier defaults, the surety pays for new sourcing or the resulting delays.

Used for: Steel, cement, machinery, electrical equipment, defence components

Key Benefit: Keeps project execution timelines intact.

6. Maintenance/Warranty Bonds

After a project is handed over, issues may still arise during the Defect Liability Period (DLP).This bond ensures the contractor:

• Repairs faults

• Fixes performance failures

Maintains safety standards

If they refuse or disappear, the Surety covers the cost.

Key Benefit: Smooth post-handover operations without additional financial burden on owners.

Conclusion

Surety bonds are becoming a practical backbone for India’s infrastructure movement. They allow contractors to bid and build without locking up precious capital, while giving project owners confidence that commitments will be met. Each type of bond plays a specific role at different stages of a project — from the first tender document to long after completion.

As familiarity and acceptance grow, surety bonds will help more businesses participate in large projects, improve execution discipline, and ultimately support a more efficient and resilient development ecosystem in the country.

What is a surety bond?

A surety bond is a financial guarantee issued by an insurer to ensure a contractor fulfils their project obligations. If they default, the insurer compensates the project owner for related losses.

Why are surety bonds used instead of Bank Guarantees?

Surety bonds reduce collateral requirements and free up working capital. Bank Guarantees typically block cash or assets, but surety bonds allow contractors to participate in larger or multiple projects without straining liquidity.

How many types of surety bonds exist in India?

There are six commonly issued surety bonds in infrastructure and public procurement:

• Bid Bonds

• Performance Bonds

• Advance Payment Bonds

• Retention Money Bonds

• Supply Bonds

• Maintenance/Warranty Bonds

When is a Bid Bond required?

Bid Bonds are required during tendering to ensure only serious contractors participate and honour their quoted terms if selected.