What a performance and payment bond actually does

A performance and payment bond is a three-party contract that guarantees a construction contractor will finish the job and pay suppliers and workers. The contractor buys the bond from a surety company (usually an insurance or bonding firm), which promises the project owner that if the contractor fails to perform or pay, the surety will step in—either by hiring someone else to finish the work or by paying out money to cover unpaid bills.

The bond is not insurance for the contractor. It is a financial may provide for the owner and the people the contractor owes money to. If a contractor walks off a job halfway through or disappears without paying the electrician, the bond holder can make a claim and recover the cost of completion or the unpaid invoices.

Performance and payment bonds are standard on public construction projects (required by law in most cases) and common on private projects above a certain dollar amount. They exist because construction is long, expensive, and involves many moving parts—and the risk that a contractor will run out of money or abandon the work is real.

Key Takeaways

  • A performance bond guarantees the contractor will finish the work as specified; a payment bond guarantees suppliers and workers will be paid.
  • The surety company (the bond issuer) is the one who pays claims, not the contractor—though the contractor must repay the surety if a claim is paid.
  • Public construction projects almost always require these bonds by law; private projects often require them when the contract is above $100,000 to $500,000, depending on the owner.
  • The contractor pays a premium (usually 1 to 3 percent of the contract value) to buy the bond upfront.
  • A claim against the bond can take weeks or months to investigate and pay, so it is not a fast way to recover money.

How the two bonds work together

The performance bond covers the owner's risk. If the contractor does not finish the work, does poor-quality work, or abandons the site, the owner can file a claim. The surety then either arranges for another contractor to complete the job or pays the owner the difference between what the original contractor was paid and what completion actually costs.

The payment bond covers suppliers, workers, and subcontractors. If the general contractor takes payment from the owner but does not pay the electrician, the plumber, or the lumber supplier, those parties can file a claim directly against the payment bond. They do not have to sue the contractor first.

In practice, these bonds are usually issued together as a single document, often called a "performance and payment bond" or a "bid bond" (which is slightly different—it guarantees the contractor will sign the contract if awarded). The surety is liable for both the performance and the payment obligations, up to the bond amount, which is typically the full contract value.

Who requires these bonds and why

Federal law requires performance and payment bonds on all public construction projects over $100,000 (the Miller Act). Most states have similar laws for state and local projects, often with lower thresholds—sometimes $50,000 or less. This is why you will see bonds listed as a requirement on government bid documents.

Private owners are not required by law to demand bonds, but many do, especially on large projects or when the contractor is unfamiliar. A bond is a way to transfer risk: instead of hoping the contractor stays solvent and honest, the owner pays a small premium and knows there is a financial backstop if things go wrong.

Some owners skip bonds on small jobs (a kitchen remodel, a fence repair) because the cost of the bond premium is not worth the protection. Others require bonds on everything. The decision usually depends on the project size, the owner's risk tolerance, and the contractor's track record.

What the bond premium costs and who pays it

The contractor pays the surety a premium to issue the bond. The premium is typically 1 to 3 percent of the contract value, though it can be higher or lower depending on the contractor's credit, experience, and claims history. A $500,000 construction contract might cost the contractor $5,000 to $15,000 in bond premiums.

The contractor usually builds this cost into the bid price, so the owner ends up paying for it indirectly. Some owners negotiate with contractors to see the bond cost separately, but the contractor still bears the upfront expense and the risk of the surety denying a claim.

The surety decides whether to issue the bond based on the contractor's financial strength, past performance, and the project details. A contractor with a history of claims or poor credit may be denied a bond or charged a much higher premium. This is one reason bonds act as a filter: only contractors the surety trusts can get bonded.

How to file a claim and what happens next

If the contractor fails to perform or does not pay suppliers, the owner or the unpaid party files a claim with the surety. The claim must include documentation: a copy of the contract, evidence of the contractor's failure (photos, invoices, correspondence), and proof of the amount owed or the cost to complete.

The surety investigates the claim, which can take weeks or months. They will contact the contractor, review the contract terms, and determine whether the claim is valid. If the contractor disputes the claim, the surety may require the claimant to prove their case more thoroughly or even go to court.

If the claim is approved, the surety pays the claimant (up to the bond amount). For performance claims, the surety may hire a new contractor to finish the work and pay that contractor directly, rather than paying the owner a lump sum. For payment claims, the surety typically pays the supplier or worker directly.

The contractor is responsible for repaying the surety for any claim paid on their behalf. This is why the bond is a may provide, not a gift: the contractor's obligation to perform or pay does not disappear just because the surety covered it.

The difference between performance bonds and other construction guarantees

A bid bond is issued when a contractor submits a bid on a project. It guarantees that if the contractor wins the bid, they will sign the contract and provide the performance and payment bonds. Bid bonds are usually much smaller (5 to 10 percent of the bid amount) because they only cover the risk that the contractor will refuse to proceed.

A maintenance bond (or warranty bond) covers defects in the work after completion. It is different from a performance bond, which covers the work during construction. A maintenance bond might may provide that a roof will not leak for five years after installation.

A payment bond alone (without performance) is rare but can be issued in some cases. It protects suppliers and workers but not the owner if the work is incomplete or defective. This is less common because owners almost always want performance protection.

What happens if the bond amount is not enough

The bond is issued for a specific amount, usually the full contract value. If the cost to complete the work exceeds the bond amount, the surety is only liable up to that limit. The owner or claimant must cover the excess themselves.

This is rare on straightforward projects, but it can happen if the contractor's failure to perform causes additional damage or if completion costs spike due to market conditions. For example, if a contractor abandons a building mid-construction and the cost to hire a new contractor and finish the work is 30 percent higher than the original contract, the bond may not cover the full overage.

This is why some owners request bonds for more than the contract value, or why they negotiate a contingency into the contract. It is also why bonds are not a complete substitute for careful contractor selection and project oversight.

Frequently Asked Questions

Can a contractor get a bond if they have had claims filed against them before?

Yes, but it is harder and more expensive. Sureties review a contractor's claims history as part of underwriting. A contractor with multiple past claims will face higher premiums or may be denied a bond altogether. Some sureties specialize in higher-risk contractors and will issue bonds at a premium cost.

What if the contractor completes the work but a supplier sues for non-payment after the bond expires?

Payment bond claims must usually be filed within a specific time frame, often 90 days to one year after the work is complete, depending on the bond terms and state law. If a supplier waits too long, they may lose the right to claim against the bond and will have to sue the contractor directly instead.

Does the bond cover poor workmanship or design flaws?

A performance bond covers failure to complete the work or failure to meet the contract specifications. If the contractor finishes the job but the work is defective, the owner can claim against the bond if the defect means the work does not meet the contract terms. However, disputes over quality are often contentious and may require the surety to investigate or even go to court.

Who can file a claim against a payment bond?

Suppliers, subcontractors, and workers who were not paid by the general contractor can file claims. They do not have to be in a direct contract with the owner; they just have to show they provided labor or materials to the project and were not paid. This is one of the key protections of a payment bond.

Can a bond be cancelled if the contractor pays the premium but then does not use it?

Bonds are typically issued for the duration of the contract plus a warranty period (often one year after completion). The contractor cannot cancel the bond early and get a refund of the premium. If the project is abandoned or cancelled, the bond remains in force until the contract period expires or the work is completed.