When a bid bond requirement is requested for a project, it keeps contractors from submitting frivolous low ball bids and helps project managers to feel secure in their choice of contractor. The company issuing the Bond does a full and comprehensive credit and financial review before they will provide a bond to a company.
During the bidding process contractors submit what they think it will cost to get the job done. It is standard practice that the surety (the provider of the bid bond) will pay the project owner the difference between the lowest and next lowest bids.