The contractor or project owner pays for the bond, depending on the contract terms
A payment bond guarantees that a contractor will pay workers and suppliers. A performance bond guarantees that the contractor will finish the work as promised. In most cases, the contractor buys and pays for both bonds themselves—the cost comes out of their business expenses. However, the contract between the property owner and contractor can shift this cost to the owner, and some industries have standard practices that override what you might expect.
The bond protects the owner and workers, but the contractor is the one who applies for it, gets underwritten, and pays the premium. Think of it like insurance: the contractor is the policyholder. The premium typically runs 1 to 3 percent of the contract value, though rates vary based on the contractor's credit, track record, and the project size.
Key Takeaways
- Contractors almost always pay for payment and performance bonds themselves, treating the cost as a business expense.
- The contract can specify that the owner reimburses the contractor for the bond cost, which is common on large public projects.
- Public works projects often require bonds by law, and the contractor's bid usually includes the bond premium.
- If a contractor defaults, the bond company pays out to workers and suppliers, not to the owner—the owner's protection is that the work gets finished or the bond covers the cost to hire someone else.
When the contractor pays the full cost
In private construction contracts, the contractor typically absorbs the bond cost as part of doing business. The contractor applies to a surety company (the bond issuer), pays the premium upfront, and the bond stays in place for the duration of the project. The contractor's bid to the owner already factors in this expense.
This is standard because the contractor is the one who benefits from bonding—it makes them more competitive, helps them win larger jobs, and protects their reputation. The surety company underwrites the contractor's financial health and past performance, not the owner's, so the contractor is the natural party to pay.
When the owner reimburses the contractor for the bond
On large public works projects and some commercial contracts, the owner agrees to reimburse the contractor for the bond premium. This is written into the contract as a line item or a percentage of the total project cost. The contractor still buys the bond and pays the surety upfront, but the owner reimburses them during the project or at completion.
This arrangement is common because public agencies and large owners want to keep the contractor's bid price as low as possible—they see the bond as a project cost, not a contractor cost. The contract will specify exactly how and when the reimbursement happens, usually as part of monthly draw requests or a final reconciliation.
Public works projects and legal requirements
Most public works projects—roads, schools, government buildings—require payment and performance bonds by law. The contractor must provide them before work starts. The cost is the contractor's responsibility unless the contract says otherwise, but the bid price almost always includes it because the owner expects to pay for the work as bonded.
On federal projects, the Miller Act requires payment and performance bonds. On state and local projects, similar laws explore. The contractor cannot start work without the bonds in place, and the surety company's approval is part of the permitting process. The owner does not pay the surety directly; the contractor does.
What happens if the contractor defaults
If the contractor fails to pay workers or suppliers, the payment bond covers those claims. If the contractor abandons the job, the performance bond covers the cost to hire another contractor to finish it. In both cases, the surety company pays out, not the owner—the owner's protection is that the work gets completed or the financial loss is covered.
The owner does not file a claim for reimbursement of the bond premium if the contractor defaults. The bond premium is a sunk cost. What the owner recovers is the cost of unpaid labor or materials (through the payment bond) or the cost to complete the work (through the performance bond). The surety company then pursues the contractor for repayment.
How bond costs affect your project bid
If you are the owner requesting bids, the contractor's price will include the bond cost unless the contract explicitly says you will reimburse it. If you want to compare true contractor costs, ask bidders to break out the bond premium separately. This shows you what the work itself costs versus the bonding expense.
On very large projects, the difference between contractors can partly reflect their bonding costs—a contractor with a strong credit history and past performance pays lower premiums than one with a weaker track record. This is one reason why the lowest bid is not always the best bid; the contractor's bonding cost reflects their financial stability.
Frequently Asked Questions
Can I ask the contractor to waive the bond?
On private projects, yes—you can negotiate any contract term. On public works, no—the bond is required by law and cannot be waived. If you are a private owner and the contractor offers to skip the bond to lower their bid, understand that you lose the protection the bond provides if they fail to pay workers or abandon the job.
If I pay the contractor upfront, do I still need a bond?
Paying upfront protects you from the contractor running out of money mid-project, but it does not protect workers and suppliers. A payment bond protects them. If you pay the contractor in full and they do not pay their workers, those workers can still file liens against your property. The bond protects you from that liability.
Who do I contact if the contractor does not pay workers?
Workers or suppliers file a claim directly with the surety company that issued the bond, not with you or the contractor. You should ask the contractor for proof of the bond and keep the surety's contact information. If you suspect non-payment, tell the contractor when ready and ask for proof that workers have been paid.
Does the bond cost change if the project runs over budget?
The bond premium is usually based on the original contract amount. If the project scope or cost increases, the contractor may need to increase the bond amount and pay an additional premium. This is the contractor's responsibility unless the contract says the owner reimburses all bond costs, including increases.
What if the contractor's bond expires before the project ends?
The contractor is responsible for renewing the bond before it expires. If it lapses, the contractor cannot legally continue work on public projects, and on private projects you have grounds to stop payment. The contract should specify that the bond must remain in force until final completion and all claims are resolved.