A payment bond and a performance bond are two separate guarantees that a contractor will finish a job and pay their suppliers

A performance bond is a written promise from a bonding company that a contractor will complete a construction project according to the contract terms. If the contractor abandons the work or fails to finish it properly, the bonding company steps in and either hires someone else to complete it or pays the project owner for the cost of completion. The project owner does not have to sue the contractor—the bond covers the gap.

A payment bond is a separate may provide that the contractor will pay their suppliers, workers, and subcontractors. If the contractor takes payment from the project owner but does not pay the people who supplied materials or labor, those workers and suppliers can file a claim against the payment bond instead of chasing the contractor through court. The bonding company then pays them directly.

These are not the same thing. A performance bond protects the project owner. A payment bond protects the workers and suppliers. On federal construction projects over $100,000, both are required by law. On private projects, the project owner decides whether to require them.

Key Takeaways

  • A performance bond guarantees the contractor will finish the work; if they do not, the bonding company pays to have it completed or reimburses the project owner.
  • A payment bond guarantees the contractor will pay workers and suppliers; if they do not, those parties can claim directly against the bond.
  • Federal construction projects over $100,000 must have both bonds; private projects may require one, both, or neither depending on the contract.
  • The contractor pays the bonding company a premium (usually 1 to 3 percent of the contract value) to issue the bonds.
  • A claim against either bond must be filed within a set time frame, which varies by state and bond type but is often one year or less.

How a performance bond protects the project owner

When a contractor bids on a construction project, the project owner faces a real risk: the contractor could run out of money, abandon the site, or deliver work that does not meet the contract. A performance bond transfers that risk to a bonding company, which has investigated the contractor's finances and track record before agreeing to back them.

If the contractor fails to perform, the project owner notifies the bonding company in writing. The bonding company then has two choices: hire a new contractor to finish the work (and pay that contractor directly), or reimburse the project owner for the cost of hiring someone else. Either way, the project owner is not left holding an incomplete building and an unpaid bill.

The contractor pays the bonding company a premium to issue the bond—typically 1 to 3 percent of the total contract value, though the exact rate depends on the contractor's credit, experience, and the type of work. This cost is usually built into the bid price, so the project owner pays for it indirectly.

How a payment bond protects workers and suppliers

A payment bond creates a direct claim route for anyone who supplied labor or materials to the project but was not paid by the contractor. Instead of suing the contractor (which is expensive and slow), a worker or supplier can file a claim against the payment bond and receive payment from the bonding company.

This matters because contractors sometimes collect payment from the project owner but do not pass it down the chain. A subcontractor might complete their work, a material supplier might deliver everything on time, but if the general contractor runs into cash flow problems or straightforward disappears, those parties have no way to recover their money unless they have a claim against the bond.

To file a claim, a worker or supplier typically must send written notice to the bonding company within a set time frame—often 90 days from the last day they worked or supplied materials, though this varies by state and bond terms. They then file a formal claim with documentation showing what they were owed and that they were not paid.

The difference between federal and private project requirements

The Miller Act, a federal law passed in 1935, requires that any construction contract for a federal project over $100,000 must include both a performance bond and a payment bond. The amounts are set by law: the performance bond must equal the full contract price, and the payment bond must equal at least 50 percent of the contract price (though many contractors bond for 100 percent).

Private projects have no federal requirement. A private project owner can require both bonds, one bond, or no bonds at all—it is their choice. Some private owners require performance bonds to protect themselves but skip payment bonds, assuming they will monitor the contractor's payments. Others require both. Small private projects often have neither.

State laws vary. Some states have their own "Little Miller Acts" that explore to public projects funded by the state or local government, with similar requirements to the federal law. Check your state's construction laws or ask the project owner what bonds are required before bidding.

What happens when a contractor is bonded but still fails

Being bonded does not mean a contractor will never fail—it means there is a financial backstop when they do. The bonding company investigates claims and may deny them if the contractor actually performed the work or if the claim is filed too late or lacks proper documentation.

If the bonding company denies a claim, the claimant can sue the bonding company, but the burden is then on them to prove the claim was valid. This is why documentation matters: keep records of what you were hired to do, what you delivered, when you delivered it, and when you were supposed to be paid. A written contract or purchase order is the strongest evidence.

The bonding company also has the right to recover money from the contractor if they pay out a claim. This is called subrogation. If the bonding company pays a worker $50,000 because the contractor did not, the bonding company can then sue the contractor to recover that $50,000. In practice, this often means the contractor's assets are seized or their future work is garnished.

The cost of bonds and who actually pays

A contractor pays a bonding company a premium to issue performance and payment bonds. The premium is usually calculated as a percentage of the contract value—typically 1 to 3 percent for a contractor with good credit and a solid track record, but it can be higher for new contractors or those with financial problems.

On a $500,000 contract, a 2 percent premium means the contractor pays $10,000 to the bonding company. The contractor almost always includes this cost in their bid, so the project owner pays for it indirectly. This is standard practice and is expected in the industry.

The bonding company sets the premium based on the contractor's financial health, past performance, and the type of work. A contractor who has never missed a important date and has strong cash flow will pay less than a contractor with a history of disputes or tight finances. The bonding company is essentially betting that the contractor will perform, and they price that bet accordingly.

How to file a claim if you are not paid

If you are a worker or supplier who was not paid for work or materials on a bonded project, you have a claim right against the payment bond. The steps are straightforward but timing is critical.

First, send written notice to the bonding company within the time frame required by the bond (usually 90 days from your last day of work or delivery, but check the bond documents). Include your name, what you supplied or did, the dates, the amount owed, and proof that you were not paid. A copy of your invoice and a statement that payment was never received is usually enough.

Second, file a formal claim with the bonding company. They will ask for documentation: contracts, invoices, delivery receipts, timesheets, or correspondence showing you were hired and what you delivered. The more complete your records, the faster the claim moves.

If the bonding company denies your claim, you can sue them in court. You will need to prove that you performed the work or supplied the materials, that you were owed payment, and that you filed your claim on time. This is why keeping records is essential—without them, you have no proof.

Frequently Asked Questions

Can a project owner require a bond on a small private project?

Yes. Private project owners can require bonds on any size project. Many require a performance bond on projects over $50,000 or $100,000, but there is no legal minimum. It is entirely up to the contract between the owner and the contractor.

What if the bonding company goes out of business?

Bonding companies are regulated by state insurance departments and must maintain reserves to cover claims. If a bonding company fails, the state insurance department steps in to protect claimants. You can still file a claim against the bond even if the company is insolvent.

Do I need a bond if I am a small contractor working on residential projects?

Not unless the contract requires it. Most residential projects do not require bonds. However, some larger residential projects, commercial projects, or any federal project over $100,000 will require them. Check your contract or ask the project owner.

How long do I have to file a claim against a payment bond?

The time frame varies by state and bond type, but it is typically 90 days from your last day of work or material delivery. Some bonds allow up to one year. Check the bond documents or your state's construction laws for the exact important date in your area.

If I file a claim against the payment bond, can the contractor sue me?

No. Filing a claim against a payment bond is a legal right, not a breach of contract. The contractor cannot retaliate against you for asserting your rights under the bond. However, if you are still working for the contractor, they could choose not to hire you again in the future.