Performance BondsFrom 0.5% of Contract
Legally required three-party contracts guaranteeing project completion. Miller Act mandates bonds for federal projects over $150,000.
📋 Get Your Performance Bond Quote
Fast approval • Competitive rates
The Construction Bond Trilogy
Bid bonds during procurement, then performance and payment bonds after contract award
1. Bid Bond
Guarantees you'll honor your bid price and obtain required bonds if awarded
2. Performance Bond
Guarantees project completion according to contract specifications
3. Payment Bond
Guarantees payment to subcontractors, laborers, and material suppliers
What is a Performance Bond?
A construction performance bond creates a legally binding obligation among three parties: the principal (contractor who purchases the bond and guarantees completion), the obligee (project owner protected by the bond), and the surety (the company issuing the bond that backs the contractor's performance). If the contractor defaults, the surety must either complete the project, hire a replacement contractor, or pay the obligee damages up to the bond's penal sum.
The penal sum represents the surety's maximum liability—typically 100% of the contract value for federal projects and most state requirements. This means a $2 million contract requires a $2 million performance bond, exposing the surety to significant risk and explaining why underwriting standards remain rigorous.
The construction surety bond market operates on fundamentally different principles than insurance. Rather than pooling risk against expected losses, sureties underwrite contractors they believe will never default—the bond serves as a prequalification mechanism. This distinction explains why the "Three C's" of underwriting (Character, Capacity, and Capital) dominate every bonding decision.
The Three-Party Surety Relationship
The General Agreement of Indemnity (GAI)
Every contractor signs a GAI requiring personal reimbursement of any surety losses. Owners of 10% or more equity—and often their spouses—must sign, creating personal liability that survives bankruptcy. The surety expects zero losses; when claims occur, they pursue recovery against the contractor and all indemnitors.
Federal Bonding Requirements: The Miller Act
The Miller Act (40 U.S.C. §§3131-3134) establishes mandatory bonding for federal construction contracts, with the Federal Acquisition Regulation (FAR) implementing specific requirements across three threshold tiers.
Contracts Over $150,000
MandatoryThe FAR at 48 CFR 28.102-1(a) requires both performance and payment bonds for all federal construction contracts exceeding $150,000. Bond amounts must equal 100% of the original contract price.
Required Federal Forms
- • SF 25: Performance Bond (construction)
- • SF 25A: Payment Bond (construction)
- • SF 24: Bid Guarantee
- • SF 25B: Continuation sheet for complex bonds
Surety Requirements
- • Must appear on Treasury Circular 570
- • Cannot exceed underwriting limit without reinsurance
- • AIA forms are NOT acceptable
- • May result in bid rejection as non-responsive
Contracts $35,000 - $150,000
FlexibleFor construction contracts in this mid-range, the contracting officer must select two or more alternative payment protections:
Waiver Authority
LimitedThe Miller Act permits waivers in limited circumstances. Contracting officers may waive bonding requirements for work performed in foreign countries when finding it "impracticable." Additionally, the Secretaries of Army, Navy, Air Force, or Transportation may waive requirements for cost-plus-fixed-fee contracts and contracts for manufacturing vessels, aircraft, munitions, or supplies.
State Little Miller Acts: A Patchwork of Requirements
Every state plus the District of Columbia has enacted bonding statutes modeled on the Miller Act, though threshold amounts and requirements vary dramatically.
States with Lowest Thresholds
| State | Threshold | Bond Amount |
|---|---|---|
| Massachusetts | $5,000 (state); $2,000 (municipal) | 50% minimum |
| Arkansas | $20,000 | 100% |
| California | $25,000 | 100% |
| Texas (payment) | $25,000 | 100% |
| Kentucky | $25,000 | 100% |
| Hawaii | $25,000 | 100% |
| New Mexico | $25,000 | 100% |
California's low threshold combined with its market size makes surety relationships particularly important for West Coast contractors.
States with Higher Thresholds
| State | Threshold | Notable Features |
|---|---|---|
| Virginia | $500,000 (general) | Highest threshold |
| Indiana | $200,000 | Four separate statutes |
| New Jersey | $200,000 (state) | $100,000 for local |
| Maine | $125,000 | Standard 100% |
| Colorado | $100,000 (state) | Only 50% bond required |
Unique State Variations
Alabama
100% performance, only 50% payment bonds
Alaska
Sliding scale: 50% under $1M, 40% for $1-5M
Idaho
Unique 85% minimum requirement
Tennessee
Minimum just 25% of contract price
Louisiana
Private projects scale from 100% to 25%
Connecticut
Municipality liable if bond not obtained
State DOT requirements often differ from general state statutes. Georgia DOT requires bonds at $50,000 vs. $100,000 statewide. Virginia DOT sets its threshold at $250,000 compared to $500,000 statewide.
SBA Surety Bond Guarantee Program
Established in 1971, the SBA program helps small and emerging contractors who cannot obtain traditional bonding by guaranteeing sureties against a portion of their losses. In fiscal year 2024, the program guaranteed over 11,000 bonds supporting more than $9.2 billion in contract value—its best performance in 25 years.
Current Program Limits (March 2024)
Guarantee Percentages
- • Contracts $100,000 or less
- • 8(a) Business Development participants
- • HUBZone certified businesses
- • Veteran-owned small businesses
- • Service-Disabled Veteran-owned businesses
All other contracts over $100,000
Fee Structure
Contractors pay a 0.6% fee on the contract price for performance and payment bond guarantees—there's no fee for bid bonds and no application fee. Sureties pay SBA 20% of the premium they charge contractors, due within 60 days of approval.
The Three C's of Surety Underwriting
Sureties evaluate contractors through three fundamental criteria—with character often proving decisive when other factors are marginal.
Character
Carries the most weight in marginal cases. A presumption against good character applies if the contractor is incarcerated, under felony indictment, or obtained bonds through fraud.
- • History of completing projects on time
- • Track record paying subcontractors
- • Quality of communication
- • Transparency in applications
- • Legal history (bankruptcies, liens)
- • Industry references
Capacity
Measures ability to perform. Sureties generally limit new projects to 1.5-2× the contractor's largest completed job.
- • Years in business
- • Project size history
- • Technical expertise of management
- • Adequate personnel
- • Equipment ownership/access
- • Quality of accounting systems
Capital
Determines financial strength. Working capital is the primary driver of bonding capacity.
- • Working capital (current assets - liabilities)
- • Net worth
- • Liquidity and cash on hand
- • Consistent profitability
- • Debt ratios (prefer <4:1)
- • Bank credit lines
Financial Statement Requirements by Bond Size
| Bond Program Size | Statement Type Required |
|---|---|
| Up to $400,000 | Credit-based; financials may not be required |
| $500,000 - $1 million | CPA-compiled statements |
| $1 - $3 million | CPA-compiled or reviewed |
| $3 - $10 million | CPA-reviewed statements |
| $10 - $100 million | CPA-reviewed (audited at higher end) |
| $100 million+ | CPA-audited statements |
Understanding Bonding Capacity
Bonding capacity represents the maximum surety credit extended to a contractor, expressed as two related limits: the single job limit (maximum for any one project) and the aggregate program limit (total bonded backlog allowed simultaneously).
The Working Capital Formula
Single job limits typically equal 50% of aggregate capacity
Example: A contractor with $500,000 working capital might receive $5-10 million aggregate capacity with a $2.5-5 million single job limit. However, sureties adjust working capital by excluding receivables over 90 days, stale inventory, officer loans, and related party receivables.
Strategies to Increase Capacity
Financial
- • Retain earnings rather than distributing profits
- • Subordinate shareholder loans to surety claims
- • Use long-term financing for equipment
- • Time payments around fiscal year-end
- • Collect aged receivables aggressively
Operational
- • Complete projects profitably and on time
- • Maintain accurate, real-time WIP schedules
- • Improve estimating accuracy
- • Pay subcontractors promptly
- • Communicate proactively with surety
Factors That Decrease Capacity
- •Financial deterioration (losses, reduced working capital)
- •Bond claims - even one claim significantly impacts capacity
- •Project problems (profit fade, disputes)
- •Loss of key personnel
- •Poor communication with surety
- •Tax liens or judgments
- •Job borrow (overbilling exceeding estimated profit)
Work-in-Progress (WIP) Schedule: Critical Underwriting Document
The WIP schedule ranks among the most important underwriting documents. Sureties analyze contract amounts, total estimated costs versus costs incurred, billings versus completion percentage, and profit fade trends across projects.
Job borrow—overbilling that exceeds estimated profit—represents a significant red flag indicating potential cash flow problems. Consistent profit fade across multiple projects suggests estimating or execution issues that may reduce future capacity.
Performance Bond Cost: 0.5% to 3% of Contract Value
Performance bond premiums use rate-per-thousand calculations. Many sureties use tiered sliding scales where rates decrease as contract value increases.
| Credit Tier | Score | Rate | $500K Contract | $1M Contract | $2M Contract |
|---|---|---|---|---|---|
| Excellent | 750+ | 0.5-1.5% | $2,500-$7,500 | $5,000-$15,000 | $10,000-$30,000 |
| Good | 700-749 | 1-2% | $5,000-$10,000 | $10,000-$20,000 | $20,000-$40,000 |
| Fair | 650-699 | 2-3% | $10,000-$15,000 | $20,000-$30,000 | $40,000-$60,000 |
| Challenged | <650 | 3-8%+ | $15,000-$40,000 | $30,000-$80,000 | $60,000-$160,000 |
Factors Affecting Premium Rates
- Contract size: Larger contracts receive lower percentage rates
- Credit and financials: 700+ scores qualify for standard programs
- Experience: Track record with similar project types
- Project duration: 12-24 months is typical; longer may cost more
Payment and Adjustments
- Due upon execution: Payable upfront or within 45 days
- Maintenance: 12-24 months typically included
- Change orders: Increases trigger additional premium
- Refunds: Generally non-refundable once submitted
The Claims Process: Surety Response Options
Understanding what triggers claims and how sureties respond helps contractors avoid defaults and navigate problems effectively when they arise.
What Constitutes Default
Owner Obligations Before Claiming (AIA A312-2010)
Owner must provide formal written notice to contractor and surety
Owner must declare the contractor in default and terminate the contract
Owner must not itself be in default (payments made per contract terms)
The 2010 AIA revision added important protections: notice failures don't automatically release the surety unless "actual prejudice" is demonstrated.
Five Surety Response Options
1. Finance the Original Contractor
The surety provides funding to allow the contractor to complete work—often the most cost-effective approach when projects are near completion.
2. Takeover Completion
The surety assumes the prime contractor role, selecting a completion contractor. Risks the "lost penal sum defense"—surety becomes fully responsible regardless of cost.
3. Tender a Replacement Contractor
The surety arranges for a new contractor to complete the project under a new contract with the owner, absorbing cost differentials.
4. Let Obligee Complete
When the contractor has credible defenses or damages approach the penal sum, the surety may decline to act while the owner completes independently.
5. Deny the Claim
If conditions precedent aren't satisfied or valid defenses exist (material scope changes, owner defaults), the surety may deny liability.
Bond Forms: Federal, State, and Private
Selecting appropriate bond forms ensures enforceability and proper protection for all parties.
Federal Projects: Standard Forms Required
Federal construction contracts over $150,000 must use SF 25 (Performance) and SF 25A (Payment). AIA forms are NOT acceptable and may result in bid rejection.
Consent of Surety Required When:
- • Modifications exceed price by $50,000+ with increased risk
- • Contract price changes by more than 25% or $50,000
- • Novation agreements
Private Projects: AIA or ConsensusDocs
AIA A312-2010 is the most widely used standard form for private construction, containing both performance and payment bonds.
Key Provisions:
- • Obligee must request pre-default discussions
- • Five enumerated surety performance options
- • "Actual prejudice" standard for notice failures
- • ConsensusDocs 260/261 as alternative
Key Bond Terms to Understand
Penal Sum
The surety's absolute maximum liability regardless of actual damages. Reducing coverage rarely reduces premium.
Duration
Bonds remain effective until all obligations are fulfilled, including warranty periods. They don't automatically expire.
Dual Obligee Riders
Extend protection to additional parties (typically lenders) without increasing aggregate surety liability.
Co-Surety Arrangements
Multiple sureties share risk on large bonds when no single surety has adequate capacity.
Best Practices for Building Bonding Relationships
Successful contractors treat their surety relationship as a strategic asset, investing in communication, financial management, and operational excellence.
Establish the Foundation
- • Work with a specialized surety bond producer, not a general insurance agent
- • Engage a construction-experienced CPA from the start
- • Prepare proper percentage-of-completion financials
- • Match contractor profiles to appropriate sureties
Maintain Communication
- • Provide requested information promptly
- • Submit interim financials every 3-6 months
- • Discuss challenges proactively
- • Contact surety immediately when problems arise
- • Build long-term relationships over rate shopping
Avoid Claim Triggers
- • Don't pursue projects beyond demonstrated capacity
- • Maintain rigorous estimating discipline
- • Don't use one project's receipts to fund another
- • Pay subcontractors and suppliers promptly
- • Document schedule impacts and change orders
If You Receive a Claim Notice
- Contact your surety broker immediately
- Gather all project documentation
- Cooperate fully with surety investigation (required under GAI)
- Provide your position with supporting documentation
- Consider whether curing the default is possible
- Explore alternative resolutions before formal proceedings
Construction Performance Bonds
$2.2 trillion construction market. Miller Act requires bonds for federal projects over $150,000.
Federal Projects
Miller Act: 100% P&P bonds over $150K
State Projects
Little Miller Acts: $5K-$500K thresholds
Private Projects
Often required for $1M+ commercial work
Service Contract Performance Bonds
Beyond construction: Performance bonds for 10+ service industries.
Government & healthcare contracts
Government IT implementations
DOD & FMCSA requirements
Facility service contracts
Institutional contracts
Government facility security
Municipal contracts
Government workforce
Consulting contracts
Building management
Frequently Asked Questions
Common questions about construction performance bonds
What is a performance bond?
When are performance bonds legally required?
How much does a performance bond cost?
What is the difference between a performance bond and payment bond?
What is bonding capacity and how is it calculated?
Can I get a performance bond with bad credit?
What are the "Three C's" of surety underwriting?
What happens if a performance bond claim is filed?
Official Government Resource
FAR Part 28: Bonds and Insurance
Federal Acquisition Regulation bonding requirements and procedures
Win Your Next Contract Today
Performance bonds unlock government and commercial contracts. Bonding capacity determines which projects you can pursue.