Performance Bonds
Guarantees you'll finish the job — or the surety will make it right.
Federal Miller Act threshold — all federal projects above this require performance bonds
What Is a Performance Bond?
A performance bond is a type of contract surety bond used in construction. It is a three-party guarantee: the surety company promises the project owner (the obligee) that the contractor (the principal) will complete the work described in the contract.
If the contractor fails to finish the job — whether due to bankruptcy, abandonment, or inability to perform — the surety steps in. The surety may hire a replacement contractor, fund the completion directly, or compensate the project owner for the cost to finish. This is not free money for the contractor. Under the indemnity agreement, the surety then seeks full reimbursement from the contractor and their personal guarantors.
Performance bonds exist because construction projects involve large sums of money, long timelines, and significant risk. Project owners — especially government agencies — need assurance that a contractor who wins a bid will actually do the work. The performance bond is that assurance.
On federal projects, performance bonds are required by the Miller Act for any contract over $150,000. Most state and local governments have similar requirements. Private project owners can require them at any dollar threshold.
Who Needs Performance Bonds?
General contractors and specialty contractors working on bonded projects need performance bonds. The most common situations include:
- Federal construction projects over $150,000 (Miller Act requirement)
- State and municipal projects (thresholds vary by state, but most public work over $25,000-$100,000 requires bonding)
- Private commercial projects where the owner requires bonding as a condition of the contract
- Design-build projects where the contractor is responsible for both design and construction
If you are bidding on public work, you almost certainly need a performance bond. If you are doing private commercial work over $100,000, you should be prepared for the owner to require one. Residential contractors generally do not need performance bonds unless the project is publicly funded.
What Do Performance Bonds Cost?
Performance bond premiums typically range from 1% to 3% of the contract value. The exact rate depends on your credit score, financial statements, experience, and the size and complexity of the project.
| Contract Value | Rate Range | Premium |
|---|---|---|
| $100,000 | 2-3% | $2,000-$3,000 |
| $500,000 | 1.5-2.5% | $7,500-$12,500 |
| $1,000,000 | 1-2% | $10,000-$20,000 |
| $5,000,000 | 1-1.5% | $50,000-$75,000 |
Larger contracts generally have lower percentage rates because the surety's fixed costs are spread over a bigger premium. Contractors with excellent credit (700+) and strong financial statements consistently get the lowest rates.
How to Qualify
Surety companies evaluate performance bond applicants based on the "Three Cs" of surety underwriting:
- Character: Your personal credit score and history. Scores above 700 are preferred. Below 650, you will face higher rates or potential decline.
- Capital: Your business financial statements — balance sheet, income statement, and cash flow. The surety wants to see working capital and net worth sufficient to support the project.
- Capacity: Your experience completing similar projects. A contractor who has completed five $500K projects is a strong candidate for a $750K bond. A contractor jumping from $100K to $2M projects raises underwriting concerns.
You will also need to sign an indemnity agreement, which makes you (and often your spouse and business partners) personally liable for any claims paid on the bond. CPA-prepared financial statements significantly strengthen your application.
State-by-State Requirements
Performance bond requirements vary by jurisdiction:
- Federal: Miller Act requires performance bonds on all federal projects over $150,000
- California: Required on public works over $25,000
- Texas: Required on government contracts over $100,000
- Florida: Required on public construction over $200,000
- New York: Required on public works over $100,000
Check your state's "Little Miller Act" for specific thresholds. Requirements also vary at the county and municipal level. The obligee (project owner) will always tell you the exact bond requirement in the bid documents or contract.
Frequently Asked Questions
How much does a performance bond cost? +
Can I get a performance bond with bad credit? +
What happens if a contractor defaults on a performance bond? +
Do I need a performance bond for private projects? +
What is the difference between a performance bond and a payment bond? +
How long does it take to get a performance bond? +
Do I need a broker to get a performance bond? +
What is the Miller Act? +
Our Editorial Insight
Performance bonds are where the biggest broker commissions live. On a $1 million project with a 1.5% premium, that is $15,000 in premium — and the broker takes $3,000 to $6,000 of it. Every year. For what?
For most performance bonds, the broker fills out an application form, forwards it to a surety company, and delivers the bond certificate. That is it. The underwriting decision is made by the surety's underwriter, not the broker. Your rate is set by the surety's rate manual, not negotiated by the broker.
Brokers will tell you they "shop the market" — that they compare multiple surety companies to get you the best rate. Some actually do this. Many send your application to one or two sureties they already have relationships with and call it a day. You have no way to know unless you ask.
The smartest thing a contractor can do is understand the underwriting process, get their financials in order, and apply directly with multiple surety companies. The time you spend learning the process is worth more than the "relationship" a broker charges 30% of your premium for.
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