Guides
Bid, performance and payment bonds: how contract surety works
Bid, performance and payment bonds guarantee construction work. What each covers, the federal and state rules, and how subcontractors and suppliers claim.
Contract surety is three bonds that follow a construction job from bid to final payment. A bid bond promises that the low bidder will sign the contract and furnish the other two bonds. A performance bond promises the owner the work will be finished if the contractor defaults. A payment bond promises that the subcontractors and suppliers will be paid. On public projects they are usually mandatory, and on private ones they are a condition of a lender or an owner.
Why public owners require them
A public owner cannot be left with a half-built school, and subcontractors cannot file a mechanic's lien against public property the way they can on a private building. The law replaces the lien with the payment bond and replaces the owner's risk of a contractor failure with the performance bond. For federal work the source is the Miller Act, 40 U.S.C. 3131. Each state has its own "Little Miller Act" for state and local projects. surety bonds explained: how they differ from insurance covers the thresholds and the parties; this guide covers the three bonds themselves.
The bid bond
A bid bond accompanies the bid. If the bidder is awarded the job and then refuses to sign, or cannot provide performance and payment bonds, the surety pays the owner. Under the federal standard form (SF 24), the principal and surety must pay the government's cost of procuring the work above the amount of the bid, up to the bond's penal sum. State, local and private forms vary in how they measure the loss, and a bond that departs from the form an owner prescribed can get a bid rejected.
Federal solicitations that require a bid guarantee ask for at least 20% of the bid price, with a cap of $3 million (FAR 28.101-2, as revised effective March 13, 2026). State and local owners commonly set their own percentage. Bid bonds are often issued at little or no charge, because the surety is evaluating you rather than taking a premium for risk, but they are a commitment: by issuing one the surety signals it will write the final bonds if you win. If it later declines, the bid bond is of little help to you. Ask for a written statement of intent or "consent of surety" for the full bonds before bidding a job near the top of your capacity.
The performance bond
The performance bond protects the owner if the contractor defaults. Under FAR 28.102-2, the penal sum on federal jobs is generally 100% of the original contract price, with increases when the price grows. Private forms, such as the AIA document A312 that combines a performance bond and a payment bond, usually follow the same convention. On default the surety's options include:
- financing the contractor to complete,
- completing the work itself or tendering a replacement contractor,
- paying the owner the cost to finish, up to the penal sum, or
- denying the claim if the owner was not in default or did not follow the bond's notice steps.
The surety's duties are tied to the underlying contract. If the owner changes the scope without notice to the surety, withholds payments it owed, or declares default prematurely, the surety may have defenses. Owners and contractors both do better when they read the bond's notice and conference provisions at signing, not at the moment of crisis.
The payment bond
The payment bond protects people who supply labor and materials: subcontractors, suppliers and, depending on the form, rental companies. On a federal job, a first-tier claimant (one with a direct contract with the prime) may sue on the bond if unpaid 90 days after the last labor or material, and must file suit within one year of that last day. A second-tier claimant (a contract with a subcontractor, not the prime) must give written notice to the prime contractor within 90 days of the last labor or material, delivered by a method that verifies delivery, under 40 U.S.C. 3133. A waiver of the right to sue is void unless it is written, signed, and given after the claimant furnished labor or material.
State deadlines differ from the federal ones, and many are shorter or require a notice early in the job. If you are a subcontractor, calendar the notice date for every public project on the day you start, and keep delivery records.
Federal rule recap
| Federal Miller Act | |
|---|---|
| Bonds required | Performance and payment bonds on construction contracts over $150,000 (FAR 28.102-1) |
| Contracts of $35,000 to $150,000 | Contracting officer picks alternative payment protection |
| Standard forms | SF 24 bid, SF 25 performance, SF 25A payment (FAR 53.228) |
| Payment bond claim, first tier | Suit after 90 days unpaid; file within one year |
| Payment bond claim, second tier | Written notice to prime within 90 days; suit within one year |
How a surety decides to bond you
Underwriters look at character, capacity and capital. For a contract bond they ask for:
- CPA-prepared financial statements (compiled, reviewed or audited, with the level rising as the program grows).
- A work-in-progress schedule showing contracts on hand, costs to date, billings and expected profit.
- Bank references and a line of credit.
- Resumes of the owners and key staff, and a record of similar jobs.
- Personal financial statements and a signed general indemnity agreement.
The result is bonding capacity, usually stated as a single-job limit and an aggregate for all jobs (bonding capacity). Say a contractor has $3 million single and $8 million aggregate capacity. A $4 million bid is out of reach, and so is a $2.5 million bid when $6 million of work is already under bond.
Hypothetical example. A site-work contractor bids a $1.8 million county project. The bid bond is written at 10% of the bid, or $180,000, and the surety gives a consent letter for final bonds. The contractor wins and delivers a $1.8 million performance bond and a $1.8 million payment bond, each at 100% of the contract. Its remaining capacity drops by $1.8 million of aggregate until the surety releases the job. The contractor should add the new work to its WIP schedule right away. A slow or underreported job is how contractors lose capacity at renewal.
If you cannot get bonded
Small and new contractors often lack the financial depth that standard sureties want. The U.S. Small Business Administration's Surety Bond Guarantee Program guarantees bid, payment, performance and ancillary bonds for eligible small businesses on contracts up to $9 million, or up to $14 million on federal contracts with a certification from the federal contracting officer. SBA does not issue the bond; it guarantees the surety against loss, which lets participating sureties write bonds they might otherwise decline. SBA lists a fee of 0.6% of the contract price on performance and payment bond guarantees and none for bid bonds. Other routes are improving the financial statements, building a bank line of credit and working with a specialized surety agent. Alternatives to a bond on small jobs, such as a letter of credit or a cash deposit, tie up the contractor's own money. Subcontractors also encounter bond requirements from general contractors, and some general contractors use subcontractor default insurance in place of sub bonds (managing subcontractor insurance and certificates).
Costs and capacity
Contract bond premiums are quoted as a percentage of the contract price, and they depend on the contractor's financial strength and the type of work. See what a surety bond costs and how it is priced for how the rate is set and what moves it, and the surety bond cost calculator for an estimate. Public owners also sometimes require both bonds and insurance; the interplay with builder's risk and liability coverage is covered in builder's risk insurance: covering a building while it is under construction and insurance requirements for government contractors.
Key takeaways
- A bid bond secures the commitment to contract; the performance bond secures completion; the payment bond secures payment of subs and suppliers.
- Federal construction contracts over $150,000 require performance and payment bonds, generally at 100% of the contract price; federal bid guarantees are at least 20% of the bid, capped at $3 million.
- Payment bond claims have strict deadlines: 90 days to notice or sue, and one year to file suit under the Miller Act. State deadlines differ.
- Capacity is built from financial statements, work-in-progress reporting and the owners' indemnity; ask for a consent of surety before you bid big.
- The SBA Surety Bond Guarantee Program is the route for small contractors who cannot qualify in the standard market.