The 3 Contract Bonds at a Glance
Three bonds show up on nearly every bonded construction project. They’re named similarly, but they protect three different people at three different moments.
- The bid bond covers the owner if you walk away from your own bid.
- The performance bond covers the owner if you don’t finish the job.
- The payment bond covers your subcontractors and suppliers if you don’t pay them.
Here’s the whole picture.
| Bond | Protects | Guarantees | When It Applies |
| Bid bond | The project owner | That you will honor your bid, sign the contract and provide the required bonds if you win | From bid submission until the contract is executed |
| Performance bond | The project owner | That the work will be completed per the contract | From contract execution to completion (and often through warranty) |
| Payment bond | Subcontractors, laborers and suppliers | That the parties below you get paid for labor and materials | Throughout the work, and during the claim window after |
All three are surety bonds, not insurance, three-party agreements built to prevent a loss rather than two-party contracts designed to compensate you for one. If the surety pays, you reimburse it.
What Is a Bid Bond, and Why Are Bid Bonds Required?
A bid bond, also called a “bid guarantee” in federal procurement terminology, is submitted with your bid. It guarantees that if the owner accepts your bid, you’ll enter into the contract at the price you quoted and furnish any performance and payment bonds the contract requires.
If you refuse, the surety compensates the owner for the difference between your bid and the next acceptable bid, up to the bond amount, and then seeks reimbursement from you.
Owners require them for a simple reason: a bid is only useful if it’s real. Without a bid bond, a contractor who realizes they underpriced the job can withdraw at no cost, leaving the owner to award to a higher bidder and absorb the difference.
The bond puts a price on walking away, and it does something else that owners value just as much: it demonstrates that a surety has already reviewed your finances and is willing to back you. A bid bond is as much a prequalification signal as a guarantee.
What Do You Need to Secure a Bid Bond?
You don’t really apply for a bid bond; you apply for a bonding facility, and bid bonds are issued from it. Sureties assess the same factors for whichever bond you need, reviewing your credit history, financial strength, experience, equipment, work in progress, management capacity, and character.
In practice, expect to produce:
- Financial statements, internally prepared for smaller programs, CPA-reviewed or audited on a percentage-of-completion basis as the numbers grow
- A work-in-progress schedule showing every open job with contract value, costs to date, and estimated cost to complete
- Personal financial statements and credit consent for each owner
- A completed-projects resume showing work of comparable size and type
- Banking and credit line details, along with your CPA and banker as references
- A signed general indemnity agreement, the document that obligates you, and usually the owners personally, to reimburse the surety
- The bid documents themselves, since the surety needs the scope, the owner, the schedule, and the bond forms required
Our white paper, What is a GIA and why do my spouse and I both have to sign? explains why sureties require that agreement.
On federal work, the amount is set by regulation: a bid guarantee is required whenever a performance or performance and payment bond is required, and it must be at least 20 percent of the bid price but cannot exceed $3 million. State and municipal awarding authorities set their own amounts, commonly 5% or 10% of the bid.
Bid bonds themselves carry no premium. The cost sits in the performance bond, typically 0.5% to 3% of the contract amount, with the payment bond usually issued alongside it at no additional charge.
What Is a Performance Bond?
A performance bond guarantees to the owner that the project will be completed in accordance with the contract. If you default and the owner properly terminates, the surety investigates and then chooses among a defined set of options:
- Finance you so you can finish;
- Tender a replacement contractor;
- Take over and complete the work itself; or
- Pay the owner its loss up to the bond penalty, which is the maximum the bond will pay, usually 100% of the contract price
Two things contractors regularly misread:
- The bond doesn’t respond to disputes about quality or delay while the contract is still running; it responds to a default under the contract, and the owner has to establish that properly.
- And the surety’s obligation is capped at the penal sum, which doesn’t increase automatically as change orders grow the contract. On a project with substantial approved changes, the bond may need to be increased by a rider.
It’s also worth being clear that a performance bond isn’t a substitute for insurance. It guarantees completion; it doesn’t cover injuries, property damage, or damage from defective work. Those remain the job of your liability program. See our construction risk solutions.
What Is a Payment Bond?
A payment bond guarantees that subcontractors, laborers, and material suppliers on the project get paid. It exists because of a structural quirk of public work: you can’t place a mechanic’s lien on public property. On a private job, an unpaid sub can place a lien on the building. On a school, a bridge, or a courthouse, they can’t, so the payment bond stands in for the lien right.
For general contractors, the payment bond is where most surety claims actually originate. A sub goes unpaid, often because their own supplier went unpaid further down the chain.
Claimants must follow notice and time requirements precisely, and those differ between the federal statute and each state’s equivalent. If you receive notice of a payment bond claim, tell your surety and your broker the same day; late reporting quickly narrows your options.
The Miller Act and Little Miller Acts
Federal construction work is governed by the Miller Act. Under 40 U.S.C. §3131, a contract exceeding $100,000 for the construction, alteration, or repair of a federal public building or public work requires a performance bond in an amount the officer considers adequate and a payment bond. The payment bond amount is equal to the total contract value unless the contracting officer determines otherwise in writing, and in no case less than the performance bond amount.
The Federal Acquisition Regulation implements that at a higher working threshold: performance and payment bonds are required for construction contracts exceeding $150,000. For contracts greater than $35,000 but not more than $150,000, the contracting officer must select two or more alternative payment protections, a payment bond, an irrevocable letter of credit, a tripartite escrow agreement, certificates of deposit, or other approved security.
Every state has its own version, the “Little Miller Acts,” and they don’t share thresholds. The two that matter most in our footprint:
| Jurisdiction | Threshold and Bond Amount |
| Federal (Miller Act) | Statute: contracts exceeding $100,000. FAR working threshold: construction contracts exceeding $150,000; alternative payment protections between $35,000 and $150,000. |
| Rhode Island | Public road, bridge or public building contracts in excess of $150,000 require a bond of not less than 50% and not more than 100% of the contract price, securing payment for labor, materials and equipment. |
| Massachusetts | Public contracts of more than $25,000 require security in an amount not less than one half of the total contract price for payment of labor and materials. |
Statutory thresholds and procurement rules are amended from time to time, and individual awarding authorities, municipalities, school building authorities, and transit agencies frequently impose their own bonding requirements above the statutory floor. Always read the bid documents for the project in front of you rather than relying on a general threshold.
How the Three Bonds Work Together on One Project
Follow a single public job through, and the sequence is straightforward.
- You bid by submitting your price with a bid bond attached at the percentage specified in the solicitation. Losing bidders’ bonds are released; yours stays live.
- The owner then awards the contract. Your bid bond obligation now requires you to sign the contract and produce the required bonds.
- At execution, you furnish the performance and payment bonds, usually at 100% of the contract price on federal work. The bid bond falls away; its job is done.
- During construction, the performance bond stands behind completion, and the payment bond stands behind everyone you owe. Approved change orders that materially increase the contract may require the bonds to be increased.
- Upon completion and closeout, the performance bond obligation ends upon acceptance, subject to any warranty or maintenance period. Payment bond claim windows continue for a statutory period afterward.
The practical takeaway for a contractor building a bonding program is that none of this gets arranged job by job. The surety approves a facility, a single-job limit, and an aggregate work-program limit, and the bonds issue from within it. Getting that facility sized correctly, before the bid you actually want, is the whole game.
Bidding Public Work? Start With the Bid Bond.
Our surety team places bid, performance, and payment bonds for contractors across all 50 states, from a first bid bond to multi-million-dollar work programs. Send us the bid documents, and we’ll tell you what the surety will need.
Want to talk before you bid? Get in touch with our surety and bond team, or read more about bid, performance, and payment bonds.
FAQs
What Is the Difference Between a Bid Bond and a Performance Bond?
A bid bond guarantees that you’ll honor your bid, enter the contract and provide the required bonds if you win. It applies between bid submission and contract execution. A performance bond takes over from there and guarantees that the work will actually be completed per the contract. Different moment, different protection, same surety relationship behind both.
Why Are Bid Bonds Required?
They make bids real. Without one, a contractor who realizes they underpriced can withdraw at no cost, leaving the owner to award to a higher bidder. The bond compensates the owner for that difference. It also signals prequalification: a surety has already reviewed your finances and is prepared to back you for the job.
What Do You Need to Secure a Bid Bond?
Business financial statements, a work-in-progress schedule, personal financial statements and credit consent from the owners, a completed-projects resume, banking and credit references, a signed general indemnity agreement, and the bid documents themselves. In practice, the surety approves a bonding facility and issues individual bid bonds from it.
Do Payment Bonds and Performance Bonds Come Together?
On public work, usually yes. They’re typically issued as a pair, and the payment bond is usually issued alongside the performance bond at no additional premium. On private projects, an owner may require only a performance bond, though many require both.
When Are Bonds Required on Public Projects?
It depends on the awarding authority. Federal construction contracts exceeding $150,000 require performance and payment bonds under FAR 28.102-1, with alternative payment protections between $35,000 and $150,000. Rhode Island requires a bond for public road, bridge, and building contracts exceeding $150,000, and Massachusetts requires a bond for public contracts exceeding $25,000. Individual agencies often go further, so read the bid documents.
This article is general information, not legal, insurance, or financial advice. Bond issuance and terms are underwriting decisions and are not guaranteed. Statutory thresholds and procurement rules vary by jurisdiction and awarding authority and change over time. Confirm the requirements for your specific project in its bid documents, and consult counsel on contract and bond claim questions.
Sources
- United States Congress (n.d.) 40 U.S.C. §3131, bonds of contractors of public buildings or works (the Miller Act). Available at: https://www.law.cornell.edu/uscode/text/40/3131 (Accessed 14 August 2026).
- Federal Acquisition Regulation (n.d.) FAR 28.102-1, performance and payment bonds for construction contracts. Available at: https://www.acquisition.gov/far/28.102-1 (Accessed 14 August 2026).
- Federal Acquisition Regulation (n.d.) FAR Subpart 28.1, bid guarantees. Available at: https://www.acquisition.gov/far/subpart-28.1 (Accessed 14 August 2026).
- Rhode Island General Assembly (n.d.) R.I. Gen. Laws §37-12-1, contractors required to give bond. Available at: http://webserver.rilegislature.gov/Statutes/TITLE37/37-12/37-12-1.HTM (Accessed 14 August 2026).
- Massachusetts Legislature (n.d.) M.G.L. c.149 §29, bonds for payment for labor and materials. Available at: https://malegislature.gov/Laws/GeneralLaws/PartI/TitleXXI/Chapter149/Section29 (Accessed 14 August 2026).
- National Association of Surety Bond Producers (n.d.) ‘What are surety bonds?’, National Association of Surety Bond Producers. Available at: https://www.nasbp.org/about-surety-bonds (Accessed 14 August 2026).
- U.S. Small Business Administration (n.d.) ‘Surety bonds’, U.S. Small Business Administration. Available at: https://www.sba.gov/funding-programs/surety-bonds (Accessed 14 August 2026).
