Construction companies typically need four project-specific surety bonds — bid, performance, payment, and maintenance — plus a contractor license bond in many states. Each project bond covers a different phase of the work, from winning the job through the warranty period after completion. Understanding the types of bonds for construction companies matters because a surety bond is not insurance: it’s a three-party guarantee, and the contractor ultimately repays every dollar the surety pays out on a claim.
Bid Bonds
A bid bond guarantees that a contractor who wins a project will sign the contract at the quoted price and furnish any required performance and payment bonds. Without it, owners would face constant risk of low bids followed by walk-aways.
The bond amount is a percentage of the total bid. On federal projects, the Federal Acquisition Regulation requires a bid guarantee of at least 20 percent of the bid price, capped at $3 million.1Acquisition.GOV. FAR Subpart 28.1 – Bonds and Other Financial Protections Private projects commonly set the figure lower, often 5 or 10 percent. If the winning bidder backs out, the surety pays the owner the difference between that bid and the next lowest responsible bid, and the contractor who walked owes the surety back for it.
Bid bonds typically cost the contractor nothing upfront. The surety issues them as part of the overall bonding relationship, expecting the contractor to buy performance and payment bonds if they win.
Performance Bonds
Once a contract is signed, a performance bond guarantees the work will be completed according to the contract terms. If the contractor defaults, the surety has several options: help the original contractor cure the problem, hire a replacement firm, complete the work itself, or pay the owner the cost to complete up to the bond’s face value.
The bond amount, called the penal sum, typically equals the full contract price. That gives the owner financial protection for the entire cost of completion if the contractor walks off the job or goes bankrupt mid-project. Before issuing the bond, the surety has already evaluated the contractor’s ability to deliver, so a performance bond claim represents a failure the surety didn’t anticipate.
Payment Bonds
A payment bond guarantees that subcontractors, laborers, and material suppliers get paid for their contributions. This matters because on a bonded project, these parties generally cannot file mechanics’ liens against the property. The payment bond replaces the lien right with a direct claim against the surety.
Under the federal Miller Act, a subcontractor or supplier who hasn’t been paid in full can bring a claim on the payment bond after 90 days from the date they last performed work or delivered materials. Parties without a direct contract with the general contractor, such as a supplier to a subcontractor, must give written notice to the general contractor within that same 90-day window. Any lawsuit on a federal payment bond must be filed within one year of the claimant’s last day of work or final material delivery.2Office of the Law Revision Counsel. 40 USC 3133 – Rights of Persons Furnishing Labor or Material State-level deadlines vary, with notice periods ranging from as short as 20 days to 120 days depending on the jurisdiction.
Maintenance Bonds
Also called a warranty bond, a maintenance bond covers defective workmanship or substandard materials that weren’t apparent at final inspection. Coverage typically runs one to two years from project completion, though some contracts require longer.
If a roof leaks or a foundation cracks during the warranty period because of something the contractor did wrong, the surety ensures the repairs happen at no additional cost to the owner. The bond does not cover normal wear and tear, damage from misuse, or problems caused by events outside the contractor’s control. This is the bond type most likely to catch contractors off guard, because the obligation extends well after they’ve packed up and moved on.
Contractor License Bonds
Separate from project-specific bonds, many states require contractors to post a license bond simply to operate legally. A license bond protects consumers and the public if a contractor violates licensing laws, commits fraud, or fails to pay employees and subcontractors. Amounts and requirements vary by state, with some states scaling the required amount based on the contractor’s license classification. Annual premiums for license bonds are generally modest, often between $75 and $1,000 depending on the bond amount and the contractor’s credit profile.
A license bond stays in place as long as the contractor holds the license, while contract bonds attach to individual projects. New contractors sometimes assume that holding a license bond means they’re bonded for project work. It doesn’t.
Bonds Required for Government Projects
Federal construction contracts exceeding $150,000 require both performance and payment bonds under rules implementing the Miller Act.1Acquisition.GOV. FAR Subpart 28.1 – Bonds and Other Financial Protections The underlying statute at 40 U.S.C. § 3131 establishes the bonding mandate for federal public works.3Office of the Law Revision Counsel. 40 USC 3131 – Bonds of Contractors of Public Buildings or Works Every surety issuing bonds on federal projects must appear on the Department of the Treasury’s Circular 570, a list of companies certified as financially sound enough to guarantee government contracts.4Bureau of the Fiscal Service. Surety Bonds – Circular 570
At the state level, “Little Miller Acts” impose similar bonding requirements on public works projects like schools, highways, and municipal buildings. Thresholds vary considerably. Some states require bonds on projects as low as $25,000; others don’t mandate them until the contract exceeds $100,000 or more. Failing to obtain the required bonds disqualifies a contractor from the project entirely and can bar them from future government bidding opportunities.
How Surety Bonds Differ From Insurance
Contractors often lump bonds in with their general liability and workers’ compensation coverage, but bonds work differently. Insurance is a two-party contract where the insurer accepts the risk of loss and pays claims without expecting reimbursement. A surety bond is a three-party guarantee where the surety expects zero losses. When a claim is paid, the contractor owes the surety back for every dollar.
The other difference is who the bond protects. General liability insurance protects the contractor. A surety bond protects the project owner. The surety is essentially vouching for the contractor’s ability to perform, and if that bet goes wrong, the contractor bears the ultimate financial responsibility through the indemnity agreement.
That indemnity agreement, signed before any bond issues, obligates the contractor and its owners to reimburse the surety for every claim payment, legal fee, and investigation expense on any bond it issues for the company. Federal regulations require sureties to obtain these agreements and secure them with appropriate collateral.5eCFR. 13 CFR Part 115 – Surety Bond Guarantee Owners sign individually, so personal assets are at stake if the company can’t cover a claim. Spouses may be asked to sign as well, though some sureties will waive spousal indemnity when the spouse has a separate business or files taxes independently.
What Construction Bonds Cost
Bond premiums are expressed as a percentage of the bond amount. For well-established contractors with strong credit and clean financials, combined premiums on performance and payment bonds typically run between 1 and 3 percent of the contract value. A contractor with weaker finances or no bonding history might pay 3 percent or more. Contractors with poor credit or past bond claims can see rates climb to 8 or 10 percent.
Credit score is the single biggest factor for smaller bonds. A score above 700 generally qualifies a contractor for the lowest rates, while a score in the low 600s can more than double the premium on the same bond. For larger contract bonds, the surety conducts a full underwriting review that weighs financial statements, work-in-progress reports, and the contractor’s track record alongside credit. Specialty projects such as design-build contracts often carry higher premiums because they place more risk on the contractor.
SBA Surety Bond Guarantee Program
Small and emerging contractors who can’t qualify for bonds on their own may be eligible for the Small Business Administration’s Surety Bond Guarantee Program. The SBA guarantees between 80 and 90 percent of the surety’s loss if the contractor defaults, which makes sureties far more willing to bond contractors with limited financial history or smaller balance sheets.6U.S. Small Business Administration. Surety Bonds
The program covers contracts up to $9 million for non-federal work and up to $14 million for federal contracts when a federal contracting officer certifies the guarantee is necessary.6U.S. Small Business Administration. Surety Bonds To qualify, the business must meet the SBA’s size standards and satisfy the surety’s evaluation of credit, capacity, and character. For contractors trying to break into bonded government work, this program is often the only realistic path to approval.