The cost of a payment and performance bond depends on the contract size and your credit history, but typically runs between 1% and 3% of the total contract value per year
A payment bond guarantees that a contractor will pay their suppliers and workers. A performance bond guarantees that the contractor will finish the job as promised. Most construction contracts over a certain size require both. You pay a surety company a premium — a non-refundable fee — upfront, and the surety agrees to cover losses if the contractor fails to perform or pay.
The premium is what you actually pay out of pocket. It is not the full bond amount. If a contract is worth $100,000 and your premium rate is 2%, you pay $2,000 to the surety. The bond itself — the may provide — is for the full $100,000, but that money only moves if something goes wrong and a claim is filed.
Who pays the premium depends on the contract. In construction, the contractor usually pays it as a cost of doing business. In some service contracts or vendor agreements, the buyer (you) may be asked to pay it or split it. Check your contract language to know who is responsible.
Key Takeaways
- Payment and performance bond premiums typically cost 1% to 3% of the contract value annually, though rates vary based on the contractor's credit, the project type, and the surety company.
- The premium is a one-time or annual fee you pay upfront; the bond amount itself (the may provide) only pays out if a claim is filed and approved.
- Contractors with strong credit histories and proven track records pay lower premiums than those with weak credit or no bonding history.
- The surety company investigates claims before paying, so approval is not automatic even if a bond is in place.
- Some contracts do not require bonds at all, and some industries use alternative guarantees like letters of credit or cash deposits instead.
What affects the premium rate you pay
Surety companies price bonds the same way insurance companies price policies: they assess risk. A contractor with a clean payment history, strong balance sheet, and years of successful projects pays less than one with liens, lawsuits, or bankruptcy on their record. The surety pulls a credit report, reviews financial statements, and checks the National Association of Surety Bond Producers (NASBP) database for past claims.
The type of work also matters. A straightforward supply contract carries less risk than a multi-year construction project in an unfamiliar market. A contractor bonding for the first time may pay 3% or higher; an established contractor with a long relationship with the surety might pay 0.75% to 1.5%.
The bond amount itself affects the rate. Larger contracts sometimes get slightly better rates per dollar because the surety's administrative cost spreads across a bigger base. A $50,000 contract and a $500,000 contract may not have proportionally different premiums.
How claims work when something goes wrong
If a contractor fails to pay suppliers or workers, or abandons the job, the person harmed (the supplier, worker, or project owner) can file a claim against the bond. The surety does not automatically pay. They investigate: they verify the claim is legitimate, that the contractor was actually obligated to perform or pay, and that the claimant followed the contract terms.
This process typically takes 30 to 90 days. The surety may deny the claim if they find the contractor was not at fault, or if the claimant did not follow proper notice procedures. If the claim is approved, the surety pays up to the bond amount, then pursues the contractor for reimbursement (called subrogation). The contractor is legally liable to repay the surety.
A claim does not automatically mean the bond is exhausted. If a $100,000 bond has a $30,000 claim paid, the remaining $70,000 is still available for future claims on the same contract, unless the contract has ended.
When bonds are required and when they are not
Federal construction contracts over $150,000 require both payment and performance bonds under the Miller Act. State and local governments often set their own thresholds — some require bonds on contracts over $25,000, others over $100,000. Private projects are not legally required to use bonds, but many large owners (developers, corporations) demand them anyway as a risk management tool.
Some industries use bonds routinely; others rarely do. Construction, surety, and public works almost always require them. Service contracts, software development, and consulting work less often. If your contract does not mention bonds, you likely do not need one.
When bonds are not required, alternatives exist: a letter of credit from a bank, a cash deposit held in escrow, or a personal may provide from the contractor's owner. These serve similar purposes but work differently and may cost less or more depending on the situation.
The difference between a one-time premium and annual renewal
Most construction bonds are priced for the duration of the contract. A 12-month project gets one premium that covers the full 12 months. You do not pay again when the contract ends, and you do not get a refund if the project finishes early.
Some ongoing service contracts or standing agreements use annual renewal. The contractor pays a premium each year the contract is active. If the contract runs for three years, they pay three separate premiums. The surety may adjust the rate each year based on claims history or changes in the contractor's credit.
Always confirm with the surety whether the quote is for a one-time premium or an annual one. A contractor quoting you a price should specify the term.
How to get a bond and what to expect
The contractor typically obtains the bond, not the project owner. They contact a surety company or a broker who works with multiple sureties, provides financial information, and pays the premium. The surety issues a bond certificate, which the contractor delivers to you as proof of coverage.
If you are the one responsible for obtaining the bond (less common but it happens), you will need the contractor's legal name, the contract amount, the contract start and end dates, and a description of the work. The surety will ask for your financial information to assess your ability to pay the premium.
Turnaround time is usually 24 to 48 hours for a contractor with an existing relationship with the surety. A new contractor or a complex project may take 5 to 10 business days. Plan ahead if the bond is a condition of starting work.
Frequently Asked Questions
Can I get a refund on the bond premium if the project finishes early?
No. The premium is non-refundable regardless of when the project ends. You pay for the full term quoted, even if work wraps up in half the time. Some sureties offer a small credit if the contract is cancelled before work begins, but this is rare and requires written request.
What happens if the contractor gets a claim but keeps working?
The claim and the work are separate. A supplier filing a claim against the bond does not stop the contractor from continuing the job. The surety investigates and pays or denies the claim independently. The contractor remains obligated to finish the work unless the project owner terminates the contract.
Do I need a separate bond for each contract, or does one bond cover multiple projects?
Each contract typically requires its own bond. A contractor bonded for one $100,000 project cannot use that bond for a second $100,000 project. Some sureties offer umbrella or annual aggregate bonds that cover multiple smaller contracts under one premium, but this is negotiated case by case.
What if the surety company goes out of business?
Surety companies are regulated by state insurance departments and must maintain reserves. If a surety fails, the state guaranty fund steps in to cover claims up to a limit (usually $300,000 to $500,000 per claim, varying by state). Claims are not lost, but there may be delays while the fund processes them.
Can a contractor get bonded if they have bad credit?
Yes, but they will pay a higher premium — potentially 3% to 5% or more. Some sureties specialize in higher-risk contractors. A contractor with serious issues (active liens, recent bankruptcy, fraud history) may be declined by mainstream sureties and have to work with specialty markets, which are more expensive.