Bid Bonds in Texas: When You Need One and What They Actually Cost
Cashier's check, surety bond, or letter of credit — Texas Local Govt Code §252.043 gives you options. Here's which to use, what bonding capacity to ask your surety for, and what it really costs to be bond-ready.
A bid bond is the municipality's insurance that if they award you the contract, you'll actually sign it. If you bid, you win, and you walk away, the bid bond pays the difference between your bid and the next-lowest bid, up to the bond amount. That's it. It's not coverage of project performance — that's the performance bond, which comes later.
Texas Local Government Code §252.044 and §262.0245 require bid security on most municipal construction contracts over $50,000. The statute lets the city pick the threshold above that floor and lets the bidder pick the form, within the set the city accepts.
The three forms of bid security
1. Surety bond
A formal bid bond from a surety company licensed to do business in Texas (check the Texas Department of Insurance licensing list before you submit). The bond runs for the term the city specifies, typically 60–120 days after bid opening. Cost: $0 to issue if you have a bonding line, since most sureties don't charge for bid bonds — they're written as a sales tool for the performance bond they hope to write next.
2. Cashier's check
You walk into a Texas bank, get a cashier's check made out to the city for 5% of your bid amount, and submit it with the bid. The check sits with the city until award. If you win and sign, it gets refunded. If you walk, the city cashes it.
Cost: cashier's check fee ($10–25) and the opportunity cost of having 5% of bid amount sitting at the city for 60–120 days. For a $400K bid that's $20K parked.
3. Irrevocable letter of credit
An LOC from your commercial bank, payable to the city, equivalent to the bond amount. Some Texas cities accept these; many don't. Read the RFP. Cost: bank fees, usually $200–500 plus a small percentage.
What size to ask for
Almost universally in Texas, bid security is 5% of the total bid amount, including all alternates the city might select. Some cities specify a flat dollar amount instead (e.g., "$5,000 cashier's check"). Read the bond instructions carefully — see mistake #2 in the disqualifier post for why this matters.
Performance bond + payment bond (after award)
The bid bond is the small bond. If you win the award, you'll need to provide a performance bond (100% of contract amount, guarantees you'll complete the work) and payment bond (100% of contract amount, guarantees you'll pay subs and suppliers). These are required by Texas Government Code Chapter 2253 on all public works contracts over $50,000 ($25,000 for payment bonds on smaller projects).
This is where the cost actually shows up. Performance and payment bond premium runs roughly 1–3% of contract amount, depending on your bonding capacity, experience, and financial strength. A $400K project bond costs $4,000–$12,000 in premium, paid upfront. You bake this into your bid.
How to get bondable
If you've never been bonded, here's the path:
- Find a surety agent who works with contractors. Not all P&C agents do surety. Ask other contractors who they use. In Texas, NASBP-member agencies are a good starting filter.
- Apply for a bonding line. The application asks for three years of company financials, personal financials of owners (yes, personal), bank references, completed work history, and current WIP (work in progress). It's similar to applying for a line of credit.
- Get an initial capacity limit. New contractors usually start at $250K–$500K single-project capacity, and $1M–$1.5M aggregate. As you complete bonded jobs, capacity grows.
- Maintain the relationship. Your surety wants quarterly WIP reports and annual financial statements (reviewed or audited preferred). Treat them like a banker.
The thing nobody tells you
Bonding capacity is the single biggest constraint on how fast a public-works contractor can grow. You can win every bid in your trade, but if your surety caps you at $1M aggregate WIP, you can't take more than $1M of work in progress at one time. That cap relaxes as you build a track record of completed bonded jobs, but it's slow — usually 2x growth per year is the most surety underwriters will support.
Knowing this changes how you should think about bid strategy. Three $300K wins fill up your $1M aggregate as fast as one $900K win, but the three-win path leaves you no capacity for the bigger work that's actually profitable. Strategic bidding considers bonding capacity, not just your shop's capacity.
What if the project is under $50,000?
Under §252.044, cities aren't required to demand bid security on construction contracts under $50,000. Some still do. Many don't. Below $25,000, payment bonds also aren't required. This is one of the reasons small municipal contracts ($15K–40K range) are an attractive on-ramp for newly-formed contractors who aren't yet bondable — you can win and complete them without the surety paperwork.
The summary
- Under $50K: usually no bond required. Submit your bid with whatever the RFP asks.
- $50K–$250K: bid security required (5% of bid). Surety bond preferred if you have a bonding line; cashier's check if not. Performance + payment bond required on award.
- $250K+: bid security required. You really want a surety relationship, not cashier's checks. Performance + payment bonds at 100% of contract value.
If you're brand-new to bidding municipal work and aren't sure whether you should be chasing $40K bids or $400K bids, start with the smaller ones. Build a portfolio of completed public-works jobs. Then have the surety conversation. By the time you have ten clean small jobs in the rearview, the bonding application is mostly a formality.