Performance Bond vs Bid Bond: What Each Does and What Each Costs
Bid bonds and performance bonds are not interchangeable — they serve different purposes at different points in the construction procurement process. One gets you through the door. The other keeps you on the job. Here is how the timeline works and what each one costs.
Table of Contents
Quick Comparison: Bid Bond vs Performance Bond
Purpose
Bid Bond: Guarantees you will enter the contract if you win the bid
Performance Bond: Guarantees you will complete the project per contract terms
Different stages of the same project
Timing
Bid Bond: Submitted with your bid proposal
Performance Bond: Furnished after contract award, before work starts
Bid bond comes first
Amount
Bid Bond: 5-10% of bid (20% on federal per FAR 28.101)
Performance Bond: 100% of contract price (FAR 28.102-2)
Performance bonds are much larger
Cost to You
Bid Bond: Usually FREE (included with bonding relationship)
Performance Bond: 0.5-3% of contract value annually
Bid bonds are a free prequalification tool
Who Is Protected
Bid Bond: The project owner — against bidders who walk away
Performance Bond: The project owner — against contractor default
Both protect the obligee, not you
What Triggers a Claim
Bid Bond: You win but refuse or fail to sign the contract
Performance Bond: You default on project obligations during construction
Very different trigger events
The Procurement Timeline
Construction bonds follow a specific sequence. Understanding this timeline is the key to understanding why bid bonds and performance bonds exist as separate instruments.
Bid Phase: Submit Bid Bond With Your Proposal
You submit a bid bond along with your bid. This tells the project owner you are serious and financially capable. The bid bond guarantees that if you win, you will sign the contract and provide the required performance and payment bonds.
Award Phase: Win the Contract
The project owner evaluates bids and selects a winner. Your bid bond is still active during this period. If you try to back out after being selected, the bid bond claim process starts.
Contract Phase: Furnish Performance + Payment Bonds
Before work starts, you provide performance bonds and payment bonds. The performance bond guarantees you will complete the project. The payment bond guarantees you will pay your subcontractors and suppliers. On federal work, both are required under the Miller Act for contracts over $150,000.
Bid Bonds Explained
A bid bond is a prequalification tool. It tells the project owner that a surety company has reviewed your financials and experience and is willing to back you. Without it, your bid gets thrown out before anyone reads your price.
Bid Bond Amounts
Learn more about bid bond costs.
What a Bid Bond Guarantees
- You will sign the contract if selected
- You will provide required performance and payment bonds
- Your bid price is genuine, not a placeholder
If you cannot follow through, the surety pays the bid spread (difference between your bid and the next lowest bidder).
FAR 28.101-1: The Link Between Bid Bonds and Performance Bonds
Federal acquisition rules say a contracting officer shall not require a bid guarantee unless a performance bond will also be required. This means bid bonds and performance bonds are intentionally paired — the bid bond is the entry ticket to a bonded project, not a standalone requirement.
Performance Bonds Explained
A performance bond is the real financial muscle of construction bonding. It guarantees that you will complete the project according to the contract terms. If you default, the surety steps in — either arranging for project completion or paying the owner for damages.
Performance Bond Requirements
See detailed performance bond pricing based on your credit and project size.
Performance bonds are where the surety takes on real financial exposure. A $5 million performance bond means the surety could be on the hook for up to $5 million if you default. That is why surety underwriting for performance bonds is significantly more rigorous than for bid bonds.
Cost Comparison
Example: $2 Million Highway Bridge Project
Bid Bond (20% = $400,000)
Cost: $0
Included with your bonding relationship. Your surety issues it for free because they want the performance bond business.
Performance Bond (100% = $2,000,000)
Cost: $10,000-$60,000/year
Rate depends on your credit score, experience, financials, and the project complexity. Good credit = lower end.
The cost gap reflects the risk gap. A bid bond exposes the surety to the bid spread — maybe 5-15% of the bid amount in a worst case. A performance bond exposes the surety to the entire contract price. Use our bond cost calculator to estimate your specific premium.
Get a quote to see exact pricing for your next project. Most contractors with credit scores above 650 qualify for rates at the lower end of the range.
What If You Win But Cannot Get the Performance Bond
This is the nightmare scenario, and it happens more often than you would think. You bid a project, win, and then discover your surety will not issue the performance bond — maybe your financials changed, maybe the project scope shifted, maybe you over-extended.
Here Is What Happens
Bid bond claim is filed. The project owner notifies your surety that you failed to perform on the bid bond obligation (signing the contract and providing bonds).
Surety pays the bid spread. Your surety pays the difference between your bid and the next lowest responsive bid, up to the bid bond penal sum.
You reimburse the surety. Under your indemnity agreement, you owe the surety everything they paid plus investigation costs and legal fees.
Potential debarment. On federal work, failing to honor a bid can lead to suspension or debarment from future government contracts. This can end your public sector business.
How to Avoid This
Before submitting any bid, get written confirmation from your surety that they will support the performance bond for this specific project at this specific price. A good surety agent will review the project details and give you a commitment letter. Never bid a project on the assumption your surety will figure it out later.
SBA Bond Guarantee Program
If you are a smaller contractor struggling to get bonded through conventional channels, the SBA Surety Bond Guarantee Program can help.
Program Limits
$14M
Maximum bond size for federal contracts
$9M
Maximum bond size for non-federal contracts
The SBA guarantees a portion of the bond, reducing the surety's risk and making it possible for contractors who would otherwise be declined to get bonded. This covers bid bonds, performance bonds, and payment bonds.
Frequently Asked Questions
Q: Are bid bonds really free?
A: In most cases, yes. Surety companies issue bid bonds at no charge because the bid bond is part of the underwriting relationship that leads to the profitable performance bond. You pay nothing for the bid bond itself. The surety makes money when you win and need the performance bond.
Q: What happens if I win a bid but my surety will not issue the performance bond?
A: The project owner makes a claim against your bid bond. Your surety pays the difference between your bid and the next lowest bid, up to the bid bond amount. You will also face potential debarment from future government work. This is why you should never bid a project without confirming your surety will support the performance bond.
Q: Can I get a performance bond without a bid bond?
A: Yes. Private projects and negotiated contracts often require performance bonds without a competitive bidding process. In those cases, you skip the bid bond entirely and go straight to the performance and payment bonds. Bid bonds are specific to competitive procurement.
Q: Does a bid bond guarantee I will get the performance bond?
A: Not automatically, but practically yes. When a surety issues your bid bond, they have already evaluated your qualifications for the project. Barring a material change in your financial condition or the project scope, the same surety will issue the performance bond. Get written confirmation from your surety before bidding.
Q: Why does FAR 28.101-1 link bid bonds to performance bonds?
A: Federal acquisition rules say a contracting officer cannot require a bid bond unless a performance bond will also be required. This prevents the government from using bid bonds as standalone gatekeeping tools. If the project needs a performance guarantee, then bid bonds make sense as a prequalification step. If not, requiring them would be unnecessary.
Q: How do payment bonds fit into this timeline?
A: Payment bonds are typically issued alongside performance bonds, after contract award. While the performance bond guarantees project completion for the owner, the payment bond guarantees that subcontractors and suppliers get paid. On federal projects over $150,000, both are required under the Miller Act. The cost for a payment bond is usually bundled into the performance bond premium.
Related Reading
Bid Bonds
Everything you need to know about bid bonds for construction.
Performance Bonds
Complete guide to construction performance bonds.
Payment Bonds
Protecting subcontractors and suppliers on your projects.
Miller Act Requirements
Federal bonding requirements for public construction.
Surety Bonds vs Insurance
Understand the fundamental difference between bonds and insurance.
All Bond Types
Browse every surety bond type we offer.
Get Bid and Performance Bonds Together
Apply once and your surety will handle bid bonds (free) and performance bonds for all your projects. Most contractors get approved the same day.