The purpose of the Bid Bond is to ensure the integrity of the tendering process and to ensure that only qualified companies submit a tender. If the Principal's tender is accepted he is obligated to enter into a formal contract with the Obligee within the time required and to provide the specified security (Bonds or other forms of security) to secure the performance of the contract.

The letter of undertaking is usually required by the beneficiary, in conjunction with a tender or bid bond. This letter represents a commitment signed by the guarantor (surety) in virtue of which the guarantor agrees to issue a performance bond in the name of the tenderer should the latter be accepted and a contract signed between the tenderer and the beneficiary.

The basic function of a Performance Bond is to provide financial protection to the Obligee up to the amount of the Bond in the event of default on the part of the Principal. Provided the Obligee has met his obligations under the Performance Bond and the contract he will claim against the Surety and will expect to be compensated within the amount of the Bond for losses suffered by reason of the Principal's default.

Basically, the function of a Labour and Material Payment Bond is to guarantee that all claimants will be paid for labour and materials furnished to the Principal for use on the project described in the Bond.