Glossary
Performance bond
A performance bond is a three-party guarantee (contractor, surety and public owner) that the work will be completed according to the contract. If the contractor defaults and is properly terminated, the surety must arrange completion, tender a replacement contractor, or pay the owner's excess completion costs up to the bond penal sum. It is a separate instrument from the bid bond submitted with your offer and the payment bond that protects your subcontractors.
On federally funded construction, 2 CFR 200.326 requires a performance bond for 100 percent of the contract price on contracts exceeding the simplified acquisition threshold.
The short version
- The bond protects the owner, not you. The surety's payout is a debt you owe it under your indemnity agreement.
- 100 percent of contract value is the standard penal sum on public work, unlike much private construction.
- The bond usually must be furnished before notice to proceed, so the timeline runs from award, not from mobilization.
- Change orders that increase the contract price generally require the bond to be increased by rider.
Why it matters to a bidder
Bonding capacity is the practical ceiling on how much public work a contractor can carry, and it is set by an underwriter rather than by the market:
- Aggregate capacity constrains your backlog. A surety approves a single-job limit and a total program limit. Winning a large job can lock you out of bidding others until it burns off.
- Financial statement quality drives the rate and the limit. Reviewed statements support more capacity than compiled ones; audited support more still.
- Premium is a real bid line. Rates are typically quoted per thousand of contract value on a sliding scale and should be estimated, not guessed.
- Default is not just a project loss. A surety takeover typically ends the contractor's bonding program and, with it, its public-sector business.
A real example
A general contractor with a $5 million single-job limit and a $12 million aggregate limit wins a $4.6 million library. Two months later a $3.9 million fire station bids. Its surety declines to add the second job because open backlog plus the new work exceeds the aggregate limit. The contractor cannot furnish a performance bond, so it cannot bid. Its capacity, not its estimating, decided which jobs it could pursue that year.
How state and local differs from federal
Federal construction bonding runs on the Miller Act, 40 U.S.C. 3131, which requires performance and payment bonds before award of a contract of more than $100,000 for construction, alteration or repair of a federal public building or public work; FAR 28.102-1 sets the operative requirement above $150,000.
Every state has a Little Miller Act imposing a parallel requirement on state and local public works, but the thresholds, the required penal sums and the claim procedures are all state-specific. Thresholds are generally far lower than the federal figure (frequently in the $25,000 to $100,000 range), and some states require bonds on any public works contract regardless of size. Local charters and school district policies can impose stricter requirements than state law. Always take the bonding requirement from the solicitation, then verify it against the state statute if the two differ.
Common questions
Is a performance bond the same as insurance?
No. Insurance transfers risk. A surety bond guarantees your obligation, and you must reimburse the surety for anything it pays.
How much does it cost?
Premium is quoted per thousand of contract value on a sliding scale that improves with size and with the contractor's financial strength. It belongs in your bid as a distinct line.
Do change orders affect the bond?
Yes. Increases in contract value under a change order normally require a bond rider, and the premium adjusts.
Can I get bonded as a new company?
It is harder but not impossible. Small business surety programs and collateralized bonds exist, and starting with smaller contracts builds the record underwriters need.