Bond Type Guide

Performance Bonds

Guarantees you'll finish the job you promised to do.

$150K
Federal threshold — performance bonds required on all government projects above this amount (Miller Act)

What is a Performance Bond?

A performance bond is a guarantee that you'll finish the job you promised to do. It's a three-party agreement between you (the principal), the project owner (the obligee), and an insurance company (the surety).

Here's how it works in plain language: a project owner hires you for a construction job. They want a guarantee that if you go bankrupt, walk off the site, or can't complete the work, someone will make it right. That's what the performance bond does.

If you finish the project as agreed, the bond expires and nothing happens. If you default, the surety steps in — they'll either help you finish the work, hire a replacement contractor, or pay the project owner the cost of completion, up to the full bond amount.

The catch: the surety then comes after you for every dollar they paid out. Unlike insurance, a surety bond is not a safety net you fall into for free. You signed an indemnity agreement that makes you personally liable. Your house, your savings, your assets — all of it is on the table.

Who needs one?

General contractors bidding on public projects. The Miller Act (1935) requires performance bonds on all federal construction contracts over $150,000. Most states have similar laws — called "Little Miller Acts" — for state and municipal projects.

Subcontractors on larger projects, where the general contractor requires bonding as a condition of the subcontract agreement.

Private sector contractors on larger commercial projects. Many private project owners require performance bonds on contracts above $500K-$1M as standard risk management.

Specific industries that commonly need performance bonds:

  • General contractors and construction managers
  • Electrical and mechanical subcontractors
  • Highway and bridge contractors
  • Environmental remediation contractors
  • IT infrastructure and systems integrators (on government contracts)

What does it cost?

Performance bond premiums typically run 1-5% of the bond amount (which equals the contract value) per year. The primary factors that determine where you fall in that range:

  • Credit score: The single biggest factor. Scores above 720 get the best rates. Below 640, expect surcharges or specialty market rates (5-15%).
  • Contract size: Larger contracts mean more risk for the surety. A $100K job is easier to bond than a $5M job.
  • Business financials: Your balance sheet, working capital, and cash flow matter. Sureties want to see that your company can financially support the project.
  • Experience: A track record of completing similar projects on time and on budget reduces the surety's risk.
  • Project complexity: A straightforward commercial build is easier to bond than a technically complex infrastructure project.

Example: On a $500,000 construction contract, a contractor with excellent credit (720+) and strong financials might pay $5,000-$10,000 for the performance bond. A contractor with fair credit (640-680) on the same project might pay $15,000-$25,000.

On top of the premium, your broker takes a commission — typically 25-30% of what you pay. On that $10,000 premium, roughly $2,500-$3,000 goes to the broker for filling out the application and submitting it to the carrier.

How do you qualify?

Surety underwriters evaluate five core areas. Here's exactly what they look at:

1. Personal credit score
This is the first thing they check. Scores above 720 open the most doors. Between 680-720 is workable with most carriers. Below 640, you'll need specialty programs or the SBA Bond Guarantee Program.

2. Business financial statements
At minimum, you'll need a current balance sheet and income statement. For larger bonds ($500K+), expect to provide CPA-prepared or audited financials. Underwriters focus on working capital (current assets minus current liabilities), net worth, and cash flow.

3. Work-in-progress (WIP) schedule
A spreadsheet showing every project you're currently working on: contract value, percentage complete, costs to date, estimated costs to complete, and expected completion date. This tells the surety whether you're overextended.

4. Industry experience
How long have you been doing this type of work? A surety wants to see 3-5+ years of experience completing projects similar in size and scope to the one you're bonding.

5. Project specifics
The contract itself matters. Sureties review the project scope, timeline, contract terms, and any unusual risks. A straightforward project with standard terms is easier to bond than one with liquidated damages clauses or unusual completion requirements.

Quick self-assessment:

  • Credit score 680+? You're in good shape.
  • Working capital at least 10% of the contract value? That's the target.
  • 3+ years doing similar work? That matters.
  • Clean claims history? Helps a lot.
  • No bankruptcies in the past 7 years? Essential.

State requirements

Every state handles performance bond requirements differently for state-funded projects. Here are the key variations:

  • Federal projects: The Miller Act requires performance bonds on all contracts over $150,000. This is non-negotiable.
  • State projects: Most states have "Little Miller Acts" with varying thresholds. Some require bonds on contracts as low as $25,000 (California), while others set the threshold at $100,000+ (Texas).
  • Municipal projects: Cities and counties often set their own thresholds, sometimes lower than the state requirement.
  • Bond amount: On public projects, the performance bond typically equals 100% of the contract value. Some private owners accept 50% bonds.

Check your state's public contracting statutes for exact thresholds, or review our glossary for more on the Miller Act and Little Miller Acts.

Common questions

How much does a performance bond cost? +
Performance bond premiums typically range from 1-5% of the bond amount (which equals the contract value). On a $500,000 contract, you'd pay roughly $5,000 to $25,000 per year. Your credit score is the biggest factor — business owners with scores above 720 usually land at the low end of that range.
What happens if I can't finish the project? +
If you default on the contract, the project owner (obligee) files a claim against your bond. The surety then has three options: help you finish the project, hire another contractor to complete it, or pay the obligee the cost of completion up to the bond amount. After that, the surety comes after you (the principal) for reimbursement through your indemnity agreement.
Do I need a performance bond for every project? +
Not necessarily. Performance bonds are typically required on public construction projects (funded by government money) and on larger private projects where the owner wants extra protection. The Miller Act requires performance bonds on all federal construction projects over $150,000. Many states have similar requirements — called 'Little Miller Acts' — for state-funded projects.
Can I get a performance bond with bad credit? +
Yes, but it will cost more. Contractors with credit scores below 640 can still get bonded through specialty surety markets (sometimes called 'substandard' or 'high-risk' programs). Expect premiums in the 5-15% range instead of 1-5%. The SBA Bond Guarantee Program is another option — it helps small and emerging contractors who can't get bonds through normal channels.
What's the difference between a performance bond and a payment bond? +
A performance bond guarantees you'll complete the project. A payment bond guarantees you'll pay your subcontractors and suppliers. They protect different parties: the performance bond protects the project owner, the payment bond protects the workers and suppliers down the chain. On public projects, you usually need both.
How long does it take to get a performance bond? +
For contractors with established surety relationships and strong financials, a performance bond can be issued in 1-3 business days. For new contractors or larger bonds, the underwriting process can take 1-3 weeks because the surety needs to review your financial statements, work history, and project details in depth.
What do underwriters look at for performance bonds? +
Five main things: (1) your personal credit score, (2) your business financial statements (balance sheet, income statement, cash flow), (3) your work-in-progress schedule (current projects and remaining work), (4) your industry experience and track record, and (5) the specific project details — size, complexity, and whether it's in your typical scope. The surety wants to know you can actually do the work, not just that you have good credit.
Is a performance bond the same as insurance? +
No. Insurance transfers risk — if something goes wrong, the insurance company pays and you don't owe them back. A surety bond is a guarantee backed by your promise to repay. If the surety pays a claim on your bond, they will come after you for every dollar through your indemnity agreement. You are always on the hook.

What most sites won't tell you

Here's what most bond sites won't tell you about performance bonds:

The broker commission on performance bonds is where the real money is. On a $1M contract with a 3% bond premium ($30,000), your broker takes roughly $7,500-$9,000. For submitting an application and making a phone call. The same application process on every single project, every single year.

And here's the part that really stings: most of the underwriting decision is based on your credit score and financial statements — data that doesn't change project to project. Once a surety has your financials on file, issuing a new bond is largely administrative. But the commission resets every time.

The other thing to know: your bonding capacity is not fixed. Brokers often present your "bond limit" as if it's carved in stone. In reality, sureties evaluate your capacity dynamically based on your current work-in-progress, financial position, and the specific project. A good financial year can expand your capacity significantly. A broker who only calls one carrier is leaving money on the table — your table.

Related bond types

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Bid Bonds

Proves you're serious when you submit a project bid.
💲

Payment Bonds

Guarantees your subs and suppliers get paid on time.
📄

License Bonds

Required by your state to legally operate your business.

Want to learn more about how bonds work? Read our complete guide.