A bid bond is a three-party guarantee between the Principal (The Contractor on the Bond), the Obligee (The Owner or Contractor Requesting the Bond) and the Surety (Bond Company Guaranteeing the Bond).
The bid bond guarantees that if the contractor is the low bidder, they will enter into a contract for the price and terms of their bid. The bid bond protects the Obligee and compensates them for costs associated with rebidding a project if the Principal does not enter into the contract.
A secondary purpose of a bid bond to prequalify contractors and make sure they are a capable and responsible bidder. This is required by many construction contracts.