Final answer:
A bid bond is a type of insurance that protects the bidder in case they submit an extremely low bid. It acts as collateral or insurance against the potential financial loss that may arise from being awarded a contract at an unprofitably low price.
Step-by-step explanation:
A bid bond is a type of insurance that protects the bidder in case they submit an extremely low bid. It acts as collateral or insurance against the potential financial loss that may arise from being awarded a contract at an unprofitably low price. The bid bond assures the project owner that the bidder is serious and financially capable of fulfilling the contract if awarded.
For example, let's say a construction company is bidding on a project. To demonstrate their commitment and financial viability, they may be required to provide a bid bond along with their proposal. If they are awarded the contract and later encounter financial difficulties, the bid bond ensures that the project owner will be compensated for any additional costs incurred in finding a replacement contractor.