Performance Bond Claims
Short answer: when a contractor defaults, the obligee (usually the project owner) must formally notify the surety and declare default following the exact sequence the bond requires — jump straight to hiring a replacement without that notice, and courts have discharged the surety entirely. Once a valid declaration is in, the surety investigates and chooses among a small set of paths: finance the original contractor to finish, take over the work itself, tender a replacement contractor, or deny the claim if a valid defense exists. The payout, if any, is capped at the bond's penal sum — typically 100% of the contract price.
This guide is written for the party filing the claim — the owner or obligee — not the contractor shopping for a bond to win the work. If you're the contractor and just received a default notice, the same sequence below tells you exactly what the surety is legally entitled to see from the obligee before it can act against you. If you're an unpaid subcontractor or supplier instead, you want how to file a payment bond claim — a different bond, a different beneficiary, and statutory notice deadlines instead of contract-based ones.
- Who requires it: The obligee, usually the project owner, files the claim; the surety investigates.
- Amount: Any payout is capped at the bond's penal sum, typically 100% of the contract price.
- The surety has 4 paths after a valid declaration of default.
Before You Can Claim: The Declaration of Default
A performance bond claim doesn't start with a demand letter — it starts with a procedural sequence the bond itself requires, and skipping steps is the single biggest reason valid claims get denied. The sequence differs by who's administering the contract.
On private work, most bonds are written on the AIA A312-2010 form. Under that form's conditions, the obligee first notifies the contractor and surety that it's considering declaring default; either party can then request a conference to work out a solution before things escalate. If the default isn't resolved, the obligee formally declares default, terminates the contractor's right to complete the work, and notifies the surety of the termination — and only then does the surety's duty to act under Section 5 of the bond kick in. On federal work, the analogous gatekeeper is FAR Subpart 49.4: the contracting officer must send the surety written notice when termination for default "appears imminent," generally after a cure notice giving the contractor 10 days to fix the specific failure, and a copy of the actual termination notice goes to the surety the same time it goes to the contractor.
The Mistake That Kills Claims
Hiring a replacement contractor and finishing the job before giving the surety the required notice and declaration. A Maryland court applying the A312-2010 form dismissed an obligee's claim on exactly these facts — the surety only learned of the default and termination after the work was already complete, and by then its Section 5 options (arrange completion through the original contractor, take over directly, or re-let to a new contractor) were meaningless. Notice isn't paperwork — it's what preserves the surety's ability to act, and acting is what its bond obligation is built around.
What to Do Instead
The moment default looks likely, put the surety on notice in writing — even before you're certain you'll terminate. This starts the conference clock running in parallel with your own decision-making instead of after it, and it gives you a documented record that you followed the bond's conditions precedent. If the contractor is already gone and the site is exposed, most sureties will authorize emergency stabilization work without treating it as a waiver — but get that authorization in writing before proceeding, not after.
The Surety's Four Paths Once Default Is Declared
Once a valid declaration of default is in the surety's hands, it doesn't simply write a check. It investigates the claim — reviewing the contract, the default notice, the project's condition, and its own principal's side of the story — and then elects one of a small number of responses. Under the AIA A312-2010 form's Section 5, and functionally mirrored in federal takeover agreements under FAR Subpart 49.4, those options are:
Finance the Original Contractor
With the obligee's consent, the surety arranges for its own principal — the original, defaulted contractor — to finish the work, typically under close financial supervision or a workout agreement. This preserves institutional knowledge of the project but requires the obligee to agree to keep working with the same contractor.
Take Over and Complete Directly
The surety steps into the contractor's shoes, hiring and managing the completion work itself under a takeover agreement. This is the most hands-on option for the surety and is more common on larger, more complex defaults where the surety wants direct control over cost and schedule.
Tender or Re-Let to a New Contractor
The surety solicits bids and selects (or "tenders") a replacement contractor to finish the job, paying that contractor directly or funding the obligee to do so. This is the most common resolution on mid-size projects — it gets an experienced completion contractor in place without the surety running the job itself.
Deny the Claim or Pay Damages
If the surety concludes a valid defense applies — a defective declaration, an obligee default, unauthorized contract changes — it can deny the claim. Where liability is clear but completion by the surety isn't practical, it can instead negotiate a cash settlement for the obligee's completion costs, up to the penal sum.
Sources: NASBP commentary and construction-law treatment of AIA A312-2010 Section 5; 48 CFR § 49.402-3 (federal takeover-agreement analog). These are contract-form and regulatory mechanics, not a statutory list — the exact language of the bond you're holding controls.
Defenses That Can Sink an Otherwise Valid Claim
A surety's liability generally runs no broader than its principal contractor's — most defenses the contractor could raise against the obligee, the surety can raise too, plus a few that are specific to the suretyship relationship.
Obligee's Own Default
If the owner failed to make required payments, denied site access, or otherwise materially breached the contract before declaring default, the surety can argue the contractor's nonperformance was excused — discharging the bond, at least in part.
Defective Notice or Declaration
Skipping the pre-declaration notice, denying a requested conference, or terminating before the bond's conditions are satisfied are all grounds courts have used to discharge sureties entirely — regardless of whether the contractor was actually at fault.
Unauthorized Contract Changes
The surety priced its risk against the original contract. Material, unapproved changes to scope, price, or schedule — the "cardinal change" doctrine — can discharge the surety from some or all of the resulting obligation.
Claim Filed Too Late
Performance bonds typically state their own limitations period (commonly two years from substantial completion or default). Miss it, and the claim is time-barred regardless of merit — check the bond document itself, not a general statute of limitations.
What the Bond Actually Pays: The Penal Sum Ceiling
Whichever path the surety chooses, its total exposure is capped at the bond's penal sum — and that cap is set when the bond is issued, not when the claim is filed. On both federal and Texas public work, the rule is the same: the bond amount equals the contract price.
Performance Bond Penal Sum
FAR 28.102-2(b)(1) — federal construction contracts over $150,000; Tex. Gov't Code § 2253.021(b) — Texas public-work contracts over $100,000, bond required 'in the amount of the contract'
Official Federal Requirements
"The Government shall require a performance bond ... The penal amount of performance bonds ... must be 100 percent of the original contract price."Federal Acquisition Regulation — Acquisition.gov • FAR 28.102-2(b)(1)
Official Texas Requirements
"The performance bond is: (1) solely for the protection of the state or governmental entity awarding the public work contract; (2) in the amount of the contract; and (3) conditioned on the faithful performance of the work in accordance with the plans, specifications, and contract documents."Texas Statutes — Texas Legislature Online • Tex. Gov't Code § 2253.021(b)
Why the cap matters more than most owners expect
Completion costs after a default routinely run higher than the original contract price — a replacement contractor is pricing a partially finished, disrupted project, not a clean scope. If your completion and delay costs exceed the penal sum, that gap isn't the surety's problem; it's yours, recoverable (if at all) only from the defaulted contractor directly or through liquidated-damages and indemnity provisions negotiated into the original contract.
Federal vs. Texas: Where the Claim Process Diverges
Texas requires a mandatory performance bond on any public-work contract over $100,000 under Tex. Gov't Code § 2253.021(a). Federal construction contracts trigger the same requirement at a higher line — over $150,000 under FAR 28.102-1, which implements the Miller Act's bonding mandate for executive agencies. Different dollar lines, and who controls the default declaration — and what has to happen before it — is meaningfully different too.
Performance Bond Default Procedure: Federal vs. Texas Public Work
Texas bonds trigger over $100,000 in contract value; federal bonds trigger over $150,000 — the claim mechanics diverge from there
| Aspect | Federal (Miller Act / FAR) | Texas Public Work |
|---|---|---|
| Who can declare default | The contracting officer, following FAR Subpart 49.4 procedure | The owner (obligee) alone — surety cannot force a default it disputes |
| Advance notice to surety | Written notice "when termination for default appears imminent," per 48 CFR § 49.402-3 | Owner must first notify the contractor and surety it is considering declaring default; either side may request a conference |
| Cure period | 10-day cure notice generally required before termination for a specific failure | Governed by the bond and underlying contract's own cure/notice-to-cure clauses, not a fixed statutory number |
| Formal declaration | Contracting officer issues a termination-for-default notice; a copy goes to the surety at the same time it goes to the contractor | Owner declares default, terminates the contractor's right to complete, and formally notifies the surety — self-help completion before this notice can void the claim |
| What triggers surety's duty to act | Receipt of the termination notice and the government's request that it "advise if it desires to arrange for completion" | Owner's compliance with every notice condition in the bond — courts have dismissed claims where the surety learned of a default only after the work was already finished |
Texas public-work bonds are governed by contract terms and the bond form itself, not a dedicated performance-bond claim-notice statute like the payment bond notice rules in Gov't Code § 2253.041 — the underlying contract's default and cure provisions control the sequence.
How Long a Performance Bond Claim Actually Takes
There's no statutory clock here the way there is on a payment bond notice — the timeline is driven by the size of the claim, how contested the facts are, and how fast the obligee moves through its own notice obligations.
Pre-declaration notice and conference window
Owner notifies contractor and surety of a potential default; either can request a conference to try to resolve it before formal termination.
Formal declaration and termination
Owner declares default, terminates the contractor's right to complete, and notifies the surety — this is when the surety's investigation clock effectively starts.
Surety investigation
Claims adjuster reviews the contract, default notice, project condition, change-order history, and the contractor's side of events before recommending a path.
Election of remedy
Surety selects financing, takeover, tender/re-let, or denial, and (if completing) begins soliciting bids from replacement contractors.
Completion, or dispute resolution
If the surety completes, timeline follows the completion contract. If it denies or the obligee disputes the amount, resolution proceeds through negotiation, mediation, or suit under the bond's own venue and limitations terms.
A claim that's clean — timely notice, no disputed change orders, cooperative contractor exit — can resolve in as little as 60-90 days. A contested claim with unauthorized change-order history or a disputed obligee default can take considerably longer, sometimes ending in litigation.
All content is researched from official state and federal sources (.gov). BuySuretyBonds.com works with Treasury-listed surety carriers.
Performance Bond Claim Questions, Answered
Real questions from owners and contractors navigating a default
Do I have to formally declare the contractor in default before the surety will do anything?
On most private jobs using the AIA A312-2010 bond form, yes — declaring default is a condition precedent, not a formality. The obligee must first notify both the contractor and surety it is considering a default declaration, then (after any conference the surety requests) formally declare default and terminate the contractor's right to complete the work, notifying the surety of that termination before taking any self-help action. On federal contracts, the analogous trigger is the contracting officer's termination-for-default notice under FAR Subpart 49.4, a copy of which goes to the surety under 48 CFR § 49.402-3. Skip the sequence — for example, hire your own completion contractor before notifying the surety — and you risk losing the claim entirely, not just delaying it.
I already hired someone else to finish the job — did I just void my claim?
Possibly, and this is the single most common way obligees lose an otherwise valid claim. Courts applying the AIA A312 form have held that completing the work before giving the surety proper notice of the default and termination discharges the surety's obligation, because it strips away the very options — arrange completion through the original contractor, take over directly, or re-let to a new contractor — the bond exists to give the surety. If you're mid-project and the contractor has already walked, get notice to the surety in writing before signing a new completion contract, even if that means a short delay.
Can the surety just deny my claim outright?
Yes, and a performance bond claim is investigated, not automatically paid. Common defenses include: the obligee itself was in material breach (nonpayment, site-access failures, or scope changes) at the time of default; the notice or declaration procedure required by the bond wasn't followed exactly; unauthorized changes to the contract were made without the surety's consent, which can discharge the surety in whole or in part under the "cardinal change" doctrine; or the claim was filed after the bond's stated limitations period. Because a surety's liability is generally no broader than the underlying contractor's, most contract-based defenses the contractor could have raised are available to the surety too.
Is the payout capped even if my actual damages are higher than the bond amount?
Almost always, yes. FAR 28.102-2(b)(1) sets federal performance bond penal sums at 100 percent of the original contract price (plus 100% of any price increase), and Tex. Gov't Code § 2253.021(b) requires the bond be "in the amount of the contract" — the bond's penal sum is a hard ceiling on what the surety owes, not a floor. If your completion and delay costs exceed that ceiling, the shortfall has to come from another remedy: a suit against the contractor directly (frequently uncollectible, which is the whole reason the bond existed), a liquidated-damages clause in the underlying contract, or — on some private jobs — an additional-insured or other risk-transfer provision negotiated up front.
My contractor and I agreed to change orders the surety never approved — does that kill my claim?
It can, partially or entirely, depending on how material the changes were. A surety's risk was priced against the original scope and price it underwrote; substantial, unapproved modifications — extending the schedule significantly, adding scope well beyond the original contract, or altering payment terms — can trigger the "cardinal change" defense, discharging the surety from some or all of its obligation. Minor field changes handled through a normal change-order process rarely cause a problem. If your project has had significant change orders, gather the full change history before filing — the claims adjuster will ask for it, and surprises found later hurt your credibility on the parts of the claim that are otherwise solid.
How is a performance bond claim different from a payment bond claim?
A performance bond protects the project owner (obligee) against the contractor's failure to finish the work — the owner is the one who files the claim. A payment bond protects subcontractors, laborers, and suppliers who weren't paid by the contractor — they file against it, not the owner. The two bonds are often issued together (a "performance and payment bond") but they run to different beneficiaries and have completely different claim procedures. If you're an unpaid sub or supplier rather than the project owner, see our guide on how to file a payment bond claim instead — the notice deadlines there are federal/state-statutory, not contract-based like most performance bond default procedures.
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