Bid Bonds vs Performance Bonds: A GC's Guide to Surety Bonds

TL;DR: Bid bonds guarantee a contractor will sign the contract and run 5-10% of the bid amount; performance bonds guarantee project completion and are typically written at 100% of the contract value, required on virtually all federal projects under the Miller Act and most state Little Miller Acts. Surety bonds are credit backing, not insurance, so qualifying depends on the GC's financials, working capital, and project history rather than loss ratios.

If you're a general contractor looking at public projects or larger private work, you're going to encounter surety bonds. Bid bonds, performance bonds, payment bonds, maintenance bonds. The surety world has its own vocabulary and its own logic, and most GCs learn it slowly through painful experience.

This guide walks through what surety bonds are, the three main types every GC should know, and how to think about bonding requirements when deciding whether to pursue a project.

What Is a Surety Bond?

A surety bond is a three-party agreement involving:

1. The principal (the contractor who is bonded)
2. The obligee (the party requiring the bond, usually the owner or upstream contractor)
3. The surety (the insurance company issuing the bond)

The surety guarantees the principal's performance on the project to the obligee. If the principal fails to perform (for example, walks off a job or can't complete it), the surety steps in and either completes the work or pays the obligee's losses up to the bond amount.

Unlike an insurance policy, a surety bond doesn't actually transfer risk. If the surety has to pay out on a bond, it turns around and collects from the principal through an indemnity agreement the principal signed when getting bonded. Surety bonds are effectively a form of credit backing with the surety acting as a guarantor and expecting to be reimbursed for any losses.

This is why qualifying for a bond is more like qualifying for a loan than buying insurance. The surety evaluates the contractor's financials, project history, working capital, and experience to decide whether to issue the bond, and at what price.

The Three Main Construction Bond Types

Bid Bond

A bid bond is a guarantee that if the contractor is awarded the project, they will enter into the contract and provide the required performance and payment bonds. If the contractor is awarded but refuses to sign or can't provide the follow-up bonds, the surety pays the obligee the difference between the contractor's bid and the next lowest responsible bid, up to the bond amount.

Bid bonds are typically 5% to 10% of the bid amount and are required on most public bid projects. Private owners sometimes require them on large projects but often don't.

The purpose: protect the owner from a contractor who bids artificially low, gets awarded, realizes they can't actually do the work for that price, and walks away.

Performance Bond

A performance bond guarantees the contractor will complete the project in accordance with the contract. If the contractor defaults (stops work, becomes insolvent, or can't complete), the surety either takes over the project, pays another contractor to complete it, or pays the owner the cost of completion up to the bond amount.

Performance bonds are typically 100% of the contract value and are required on virtually all federal projects (under the Miller Act) and most state and local public projects (under state Little Miller Acts). Private projects sometimes require performance bonds on larger contracts.

The purpose: protect the owner from the contractor's failure to complete the project after work begins.

Payment Bond

A payment bond guarantees that the contractor will pay all subcontractors, suppliers, and laborers on the project. If the contractor fails to pay a downstream party, that party can file a claim against the payment bond and recover what they're owed, up to the bond amount.

Payment bonds are also typically 100% of the contract value and are required alongside performance bonds on most federal and public projects. The Miller Act requires payment bonds on federal projects over $150,000.

The purpose: substitute for mechanic's lien rights on public projects (you can't lien government property) by giving subs and suppliers a recovery mechanism when they aren't paid.

Other Bond Types GCs May Encounter

• Maintenance bond: Guarantees the contractor will correct defects for a warranty period after project completion, typically one to two years. Sometimes included in the performance bond; sometimes issued separately.
• Supply bond: Guarantees a supplier will deliver materials per contract terms. Used when the contractor is at risk on material delivery.
• License and permit bond: Required by some state contractor licensing boards as a condition of holding a license. Different from a project-specific bond.
• Subcontractor bond: When a GC requires a sub to be bonded back to the GC. Common for key subs on large projects or specialty work.

What It Costs to Get Bonded

Bond premiums are typically 1% to 3% of the contract value, depending on the contractor's financial strength, experience, and the surety's underwriting. A strong contractor with clean financials and a good track record might pay 1% on a $5M performance bond ($50,000). A weaker contractor might pay 3% ($150,000) or be unable to get bonded at all.

The premium is paid by the contractor but is typically reimbursable as a cost on the project. Contract terms usually allow the contractor to include the bond premium in the bid.

How Sureties Evaluate Contractors

When a contractor applies to be bonded, the surety evaluates:

Financial Strength

• Working capital (current assets minus current liabilities)
• Net worth
• Debt levels
• Cash flow
• Bank relationships and lines of credit

Most sureties apply a "10/20" rule: a contractor can typically handle a single bonded project up to 10 times their working capital and an aggregate backlog up to 20 times. Contractors stretching this ratio may get bonded but at higher rates.

Experience and Track Record

• Years in business
• Types of projects completed
• Claims history
• References from owners and subcontractors

A contractor taking on a project type they've never done before will face scrutiny, even if their financials are strong.

Management and Operations

• Quality of internal project management systems
• Insurance program
• Subcontractor compliance program
• Risk management practices

This is where subcontractor compliance documentation becomes part of the bonding story. Sureties increasingly ask about a contractor's sub management systems. A GC who can demonstrate they track COI, W-9, WC, and license compliance for every sub on every project presents as a lower-risk candidate than one who manages compliance in a spreadsheet.

PaperBoss isn't a bonding application, but the audit reports it generates can be shown to a surety as evidence of a mature compliance program. Showing a surety a clean compliance dashboard across your active projects makes a measurable difference in how they perceive your risk profile.

How Bonds Affect Bidding Strategy

Bonding requirements should be factored into bidding strategy from the start:

Can You Actually Get Bonded?

Before spending time on a public project, confirm with your surety that they'll issue a bond for this size and type of work. Some contractors waste weeks on RFPs for projects they can't actually be bonded for.

What's the Premium?

Your bond premium is part of your cost. Don't bid the project with a stale premium estimate from last year. Get a fresh quote from your surety that reflects current project size and current market conditions.

Do Subs Need to Be Bonded Back to You?

On larger projects, you may want key subs to post their own performance bonds back to you, shifting risk downstream. This adds to the sub's cost (which they'll pass through) but protects you if the sub defaults. Decide early whether to require this.

Is This Project Worth the Bond Risk?

Bonded projects tie up your bonding capacity. If you take a $5M bonded project, that's $5M of performance bond against your aggregate limit, reducing the bonding you have available for other work. Some contractors avoid very large bonded jobs because they crowd out more profitable smaller work.

Subcontractor Compliance and Payment Bonds

One often-overlooked issue: payment bonds protect unpaid subs, but only if the subs assert their claim properly. Payment bond claims have specific notice and filing requirements that vary by jurisdiction. If a sub misses the deadline or files incorrectly, the claim is barred even if the sub is legitimately owed money.

For GCs, the lesson is that payment bonds don't substitute for paying subs on time. They're a safety net, not a first-line solution. GCs should still track sub payments and compliance rigorously, and surety underwriters will look for evidence of that discipline when evaluating bonding applications.

Frequently Asked Questions

Are bonds required on private construction projects?

Not legally required, but some private owners require them, especially on larger projects. Private-project bond requirements are contractual rather than statutory.

Can I get bonded if I'm a new GC without a track record?

It's harder but possible. Sureties may require more collateral, limit the bond size, or require personal guarantees from the contractor's principals. Building a relationship with a surety broker early in your career pays off when you eventually need larger bonds.

What happens if my surety pays a claim?

The surety pays the obligee (owner or claimant) and then collects from you through the indemnity agreement you signed at bonding. This can be a large financial hit. Sometimes enough to put a contractor out of business. Sureties don't write off losses the way insurance companies do.

Are bid bonds refunded if I don't win the project?

Bid bonds are typically not refunded because they were never paid out. They're a guarantee, not a deposit. The surety keeps the premium regardless of whether you win.

Can I substitute a letter of credit for a bond?

Sometimes. Some owners accept a letter of credit in lieu of a performance bond, but this ties up the contractor's banking relationship and working capital. Most contractors prefer bonds because they free up cash.

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This article is for educational purposes only and does not constitute legal, financial, or surety advice. Consult a qualified surety broker or construction attorney for specific bonding questions.