Key Takeaways
- A bid bond guarantees you will sign the contract and provide the required bonds if you win; performance and payment bonds then guarantee you finish the work and pay your subs and suppliers.
- Surety bonds are not insurance for the contractor; you sign an indemnity agreement and must repay the surety for any valid claims it pays.
- Sureties underwrite character, capacity, and capital, so clean financial statements, work-in-progress schedules, and a track record drive approval and pricing.
- Building a relationship with a surety before you need a large bond is the most reliable way to grow your single-job and aggregate bonding limits.
Bid, performance, and payment bonds are contract surety bonds that guarantee a contractor will honor its bid, complete the project according to the contract, and pay subcontractors and suppliers, says the team at Bozzuto Group, a San Diego–based specialty commercial insurance brokerage. Public projects usually require them, and many private owners and lenders do too.
How does a construction surety bond work?
A surety bond is a three-party agreement:
- Principal: the contractor whose performance is guaranteed.
- Obligee: the project owner (or GC, for subcontract bonds) who receives the guarantee.
- Surety: the company that issues the bond and stands behind the principal's obligations.
The key difference from insurance is who ultimately pays. Insurance spreads losses across many policyholders. A surety, by contrast, extends credit based on your ability to perform. Before issuing bonds, the surety has you, and often your company's owners and their spouses, sign a general indemnity agreement. If the surety pays a valid claim, you are obligated to repay it.
What is the difference between bid, performance, and payment bonds?
| Bond | What it guarantees | Who it protects | When it applies |
|---|---|---|---|
| Bid bond | If you win, you will sign the contract at your bid price and furnish the required performance and payment bonds | Project owner | Submitted with the bid |
| Performance bond | You will complete the work according to the contract terms | Project owner | From contract signing through completion and often a warranty period |
| Payment bond | You will pay your subcontractors, laborers, and material suppliers | Subs and suppliers (and indirectly the owner) | Throughout the project |
Bid bonds
A bid bond is usually set as a percentage of your bid amount, as specified in the bid documents. If you are the low bidder and then refuse to sign or cannot provide final bonds, the owner may claim against the bid bond to cover the cost of moving to the next bidder. Many sureties issue bid bonds at little or no cost to contractors they have already approved, because the real underwriting happens on the performance and payment bonds.
Performance bonds
If you default, the surety investigates and may finance you to finish, bring in a replacement contractor, or pay the owner up to the bond amount. Performance bonds commonly cover warranty obligations as well, so the exposure can extend past substantial completion.
Payment bonds
Mechanics liens generally cannot be placed on public property. Payment bonds give unpaid subcontractors and suppliers on public jobs a path to get paid instead. On private projects, payment bonds can also be used to keep the property free of liens.
When are contract bonds required?
The federal Miller Act requires performance and payment bonds on federal construction contracts above a set threshold, and most states have similar statutes, often called "Little Miller Acts," for state and local public works. Thresholds and bond amounts vary by jurisdiction and are written into each project's bid documents.
Private owners, developers, and lenders may also require bonds, particularly on larger projects or when they are working with a contractor for the first time. General contractors sometimes require bonds from key subcontractors, such as mechanical or electrical trades, whose default would delay the whole job.
What do sureties look at when underwriting?
Surety underwriting is often summarized as the three Cs:
- Character: your reputation, history of completing work, how you treat subs and suppliers, and any past claims or disputes.
- Capacity: your experience with similar project types and sizes, management depth, equipment, and current backlog.
- Capital: your working capital, net worth, banking relationships, and the quality of your financial statements.
Expect to provide year-end financial statements (CPA-reviewed or audited for larger programs), interim financials, a work-in-progress (WIP) schedule, a list of completed projects, resumes of key people, and personal financial statements for owners. Your bonding capacity is usually expressed as a single-job limit and an aggregate limit across all bonded work in progress.
How much do contract bonds cost?
Bond premiums are typically a percentage of the contract amount, set on a rate schedule that may decline as job size increases. Rather than relying on rule-of-thumb percentages, focus on the factors that move your rate:
- Strength and quality of your financial statements.
- Personal and business credit of the owners.
- Years in business and experience with similar work.
- Project size, type, duration, and warranty period.
- Your history with sureties, including any prior claims.
Contractors with thinner financials may still qualify through programs designed for smaller or newer firms, sometimes with collateral or funds control requirements.
How Bozzuto Group Helps
We help contractors prepare surety submissions that underwriters can act on, including organized financials, WIP schedules, and project histories. We match you with sureties suited to your size and trade, explain the indemnity agreement before you sign it, and track your single-job and aggregate limits as your backlog changes so you are not caught short at bid time. We also coordinate your bonds with your builder's risk and liability coverage, which owners frequently require in the same contract. For smaller license and permit bonds, our Buy a Bond page offers a faster path. See how we support construction businesses.
Bidding public work or growing your bonding line? Call 858-805-1865 or contact our surety team.
Frequently Asked Questions
What is the difference between a performance bond and a payment bond?
A performance bond guarantees the project owner that the contractor will complete the work according to the contract. A payment bond guarantees that the contractor will pay its subcontractors, laborers, and material suppliers. Public projects usually require both, and they are often issued together for the full contract amount, though the required amounts are set by each project's bid documents.
Do I have to pay back the surety if there is a bond claim?
Yes, in most cases. Before issuing contract bonds, the surety requires a general indemnity agreement, often signed by the company and its owners personally. If the surety pays a valid claim or incurs costs investigating one, you are obligated to reimburse it. That is a key difference between surety bonds and insurance.
How do I increase my bonding capacity?
Strengthen your balance sheet by retaining earnings and maintaining working capital, move to CPA-reviewed or audited financial statements, keep accurate work-in-progress schedules, and complete projects profitably and on time. Building a steady relationship with one surety and gradually taking larger jobs within your experience typically leads to higher single-job and aggregate limits over time.
How long does it take to get a performance bond?
Once a contractor is approved with a surety and has an established bonding line, final bonds can often be issued quickly after contract award. A first-time applicant needs more time because the surety must review financial statements, work history, and credit. Starting the underwriting process well before you bid helps avoid delays.
Is a bid bond refundable?
A bid bond is not a deposit, so there is nothing to refund. It is a guarantee from the surety. If you win and sign the contract with the required bonds, or if you do not win, the bid bond's obligation simply ends. A claim arises only if you win and then fail to sign or furnish final bonds.