Most construction contracts that call for bonding call for more than one. Bid, performance and payment bonds are the three contract bonds a general contractor meets most often, and they follow the job in order: one backs your bid, the other two back the contract after award. Each protects a different party against a different risk, and a surety writes all three after reviewing the same contractor file.
This guide explains what each bond does, who it protects, how the three fit together from bid day to closeout, and how sureties decide how much work they will back. For the full range of bonds contractors carry, see the Single Source Surety contractor and construction bonds page.
What are bid, performance and payment bonds?
Bid, performance and payment bonds are contract surety bonds used on construction projects. A bid bond backs a contractor’s promise to sign the contract and provide final bonds if it wins. A performance bond backs completion of the work under the contract. A payment bond backs payment to the subcontractors and suppliers on the job.
Each bond has three parties. The principal is the contractor. The obligee is the party the bond protects, usually the project owner, or the general contractor on a subcontract bond. The surety issues the bond and backs the principal’s obligation. A bond is not insurance for the contractor: if the surety pays a valid claim, it expects repayment under the indemnity agreement the contractor signed.
Bid bond
A bid bond is submitted with the bid. It tells the owner that if your bid is accepted, you will sign the contract at your bid price and furnish the required final bonds. The bond amount is usually a percentage of the bid set in the bid documents. If the winning bidder backs out, the owner can claim on the bid bond, often for its added cost of awarding the work to the next bidder, up to the bond amount and subject to the bond form.
Performance bond
A performance bond is delivered after award, before work starts. It protects the owner if the contractor fails to complete the work according to the contract, plans and specifications. The bond amount is normally tied to the contract price, and it typically follows approved change orders that increase the contract, subject to the bond form.
Payment bond
A payment bond is usually issued alongside the performance bond. It protects the people who supply labor and materials to the project: subcontractors, sub-subcontractors, suppliers and, on many jobs, laborers. Liens generally cannot attach to public property, so on public work the payment bond is their main path to payment. On private work, it can help keep liens off the owner’s property.
| Bond | When it is issued | Who it protects | What it backs |
|---|---|---|---|
| Bid bond | With the bid | Project owner | Signing the contract and furnishing final bonds if awarded |
| Performance bond | After award, before work starts | Project owner | Completing the work per the contract |
| Payment bond | After award, with the performance bond | Subcontractors, suppliers and laborers | Payment for labor and materials on the project |
| Maintenance bond | At or near completion | Project owner | Correcting covered defects during the warranty period |
How do bid, performance and payment bonds work together?
The three bonds form a chain. The bid bond commits the low bidder to sign the contract and deliver performance and payment bonds. Those final bonds then cover the life of the contract: the performance bond protects the owner’s project, and the payment bond protects the subcontractors and suppliers who build it.
On a typical bonded job, the sequence looks like this:
- Prequalification. Before you bid, the surety reviews your company and sets the size of job it will back.
- Bid. You request a bid bond for the specific project, in the amount and form the bid documents call for, and submit it with your bid.
- Award. The owner issues a notice of award and sends the contract for signature.
- Final bonds. The surety issues the performance and payment bonds, usually on the owner’s required form.
- Construction. The bonds stay in force while the work is underway. Keep your surety informed of large change orders.
- Completion and closeout. After final acceptance and payment, the owner’s release and any claim periods allowed by the contract or law close out the bond obligation.
- Maintenance period. If the contract requires it, a maintenance bond covers the warranty period after completion.
Because a surety that writes your bid bond generally expects to write the final bonds if you win, it reviews the job before issuing the bid bond, not after. That is the practical link between bid, performance and payment bonds: one underwriting decision covers all three.
Bid bond vs performance bond: what is the difference?
A bid bond covers the bidding stage and ends once the winner signs the contract and delivers final bonds. A performance bond covers the construction stage and protects the owner if the contractor does not finish the work. The bid bond is a smaller commitment; the performance bond backs the whole contract.
The payment bond is the one most often confused with the performance bond. Both are issued at award and run for the life of the contract, but they protect different people. The performance bond answers the owner’s question, “Will this project get built?” The payment bond answers the subcontractor’s and supplier’s question, “Will I get paid for what I put into it?” Owners often require both, because a finished project can still leave unpaid bills behind.
What happens when a claim is made on a construction bond?
When a claim is made, the surety investigates before it pays. It reviews the bond, the contract and the facts from both the claimant and the contractor. If the claim is valid, the surety resolves it under the bond’s terms and then looks to the contractor and any indemnitors to repay what it spent.
The details depend on the bond type and form:
- Bid bond claims usually arise when a low bidder refuses to sign or cannot furnish final bonds.
- Performance bond claims generally start with the owner declaring the contractor in default under the contract. Depending on the bond form and the situation, a surety may consider options such as financing the original contractor to finish, arranging for a completion contractor, letting the owner complete and paying covered costs, or denying the claim if it has a valid defense.
- Payment bond claims come from unpaid subcontractors and suppliers. Claimants usually must give written notice and file within time limits set by the bond and the applicable law, so anyone relying on a payment bond should read it early in the job.
Each path ends with the contractor’s indemnity obligation, and a paid claim can make future bonding harder.
How sureties decide on bid, performance and payment bonds
Contract bonds are underwritten more like credit than insurance. The surety is betting that you will finish the work and pay your bills, so it studies your company before it backs a job. Underwriters often describe the review as three Cs.
- Character. Your reputation with owners, subcontractors and suppliers, how you handle disputes, and the experience and integrity of the people running the company.
- Capacity. Your people, equipment, systems and track record on work of the type and size you are bidding, plus the work you already have in progress.
- Capital. Your financial strength: working capital, net worth, cash flow, debt, bank relationships and the quality of your financial statements.
Expect requests for company and personal financial statements, a work-in-progress schedule, completed-project history, bank references and details on the job you want to bid. Larger programs usually call for CPA-prepared statements.
The result is your bonding capacity, usually expressed as two limits: the largest single job the surety will bond and the total amount of bonded work it will allow you to carry at once. Both tend to grow as your finances strengthen and your record of completed bonded work gets longer. The guide to increasing your surety bond capacity covers that growth in detail. If credit is a concern, read about surety bonds with bad credit; it is one factor in the review, not the only one.
The premium for performance and payment bonds depends on the contract amount and the surety’s view of your risk. Ask how pricing works for your account before you bid, so the bond cost is built into your number.
Maintenance bonds after completion
Some contracts require a maintenance bond that runs for a set warranty period after the project is accepted. It protects the owner if covered defects in workmanship or materials show up during that period and the contractor does not correct them. Some contracts fold this obligation into the performance bond instead. The contract documents say which applies.
Where are bid, performance and payment bonds required?
Bonds are most often required on public construction. Federal, state and local governments generally require performance and payment bonds on contracts above set thresholds, and bid bonds or other bid security when bonds will be required. Private owners and lenders may also require them by contract. Rules vary by state and agency.
On federal projects, the requirement comes from the statute long known as the Miller Act, now codified at 40 U.S.C. 3131, and implemented through FAR 28.102-1, which sets the current contract threshold. Most states have their own versions, often called “Little Miller Acts,” for state and local public work. For more on how these requirements apply to public jobs, read the importance of contractor bonds in public construction projects.
Small contractors who have trouble qualifying for bonding through the standard market may be eligible for the U.S. Small Business Administration’s surety bond guarantee program, which supports bid, performance, payment and maintenance bonds issued by participating sureties.
Frequently asked questions
Do I need a performance bond if I have a bid bond?
Usually, yes. The bid bond only covers the bidding stage. If you win a job that requires final bonds, you must furnish the performance and payment bonds the contract calls for. Failing to provide them is one of the most common reasons a bid bond claim is made.
Who pays for a payment bond?
The contractor buys the bond, and the cost is generally built into the bid price. The bond protects subcontractors and suppliers, but they do not pay for it, and they are not the surety’s customer.
Can a subcontractor claim on a performance bond?
Generally, no. The performance bond protects the owner named as obligee. Subcontractors and suppliers who have not been paid normally look to the payment bond. A general contractor can require its own subcontractors to provide performance and payment bonds naming the general contractor as obligee.
Are performance and payment bonds always issued together?
On public work they usually are, because the law often requires both. On private projects the owner or lender decides. Some private owners ask for only a performance bond, and some ask for both. The contract documents control.
How long does a performance bond last?
Generally until the work is complete and accepted and any claim periods in the bond or contract have run. Warranty obligations may extend it or call for a separate maintenance bond.
Get your next bonded job lined up
Bid, performance and payment bonds come from one surety relationship, so set it up before the bid you want is advertised. Gather your financial statements, work-in-progress schedule and job history, then visit the Single Source Surety contractor and construction bonds page to start a bid, performance or payment bond request.
This article is general information, not legal advice. Bond requirements, claim procedures and deadlines vary by state, agency and contract; the bond form and contract documents control.