The cost of a payment and performance bond depends on the contract value and your credit history, but typically runs 1 to 3 percent of the total project cost
A payment bond guarantees that a contractor will pay their suppliers and workers. A performance bond guarantees that the contractor will finish the job as promised. Most construction projects over a certain dollar amount require both. The surety company (the bond issuer) charges a premium—the fee you pay upfront—based on how much money the bond covers and how risky the surety thinks you are.
If a contractor on a $500,000 project pays a 2 percent premium, that bond costs $10,000. The surety holds that money as insurance. If the contractor fails to pay workers or complete the work, the surety pays out the claim, and the contractor owes the surety back. The premium is non-refundable, even if no claim is ever filed.
Key Takeaways
- Payment and performance bond premiums usually cost between 1 and 3 percent of the contract value, paid upfront to the surety company.
- The surety sets the premium based on the project size, the contractor's credit score, payment history, and past bond claims.
- A contractor who defaults on a bond claim must repay the surety for any payout, plus interest and collection costs.
- Some states set minimum or maximum premium rates for public works projects, so the cost may be regulated depending on the job type and location.
What determines the premium rate you pay
Surety companies use several factors to price a bond. The biggest is the contract value—the total dollar amount of the project. Larger projects cost more to bond because the surety's potential payout is larger. A $100,000 job and a $1 million job do not pay the same premium rate.
Your credit score and payment history matter just as much. A contractor with a score above 700 and no late payments typically pays 1 to 1.5 percent. One with a score below 650 or a history of defaults may pay 3 percent or higher, or be denied altogether. The surety pulls your personal credit report and your business credit report (if you have one) before quoting.
Past bond claims and project defaults also raise the rate. If you have filed a claim on a previous bond or walked away from a job, the surety will either charge more or refuse to bond you. Some sureties keep a database of contractors and their claim history, so a problem on one project can follow you to the next.
The type of project also affects cost. Public works projects (government-funded) sometimes have state-set minimum or maximum rates. Private projects have more flexibility. Specialty work—like electrical or HVAC—may cost more to bond than general contracting because the surety sees it as higher risk.
How the bond claim process works if something goes wrong
If a contractor fails to pay workers or suppliers, those parties can file a claim against the payment bond. The claimant must prove they did work or supplied materials on the project and were not paid. They submit documentation—invoices, delivery receipts, timesheets—to the surety.
The surety investigates the claim. If it is valid, the surety pays the claimant up to the bond limit (usually the full contract value). The contractor is then liable to the surety for the full payout, plus interest (typically 6 to 10 percent annually) and collection costs. The surety may place a lien on the contractor's assets or pursue a lawsuit to recover the money.
A performance bond claim works similarly. If the contractor abandons the job or fails to meet the contract terms, the project owner files a claim. The surety can either hire a new contractor to finish the work or pay the owner the cost difference between what was contracted and what it costs to complete the job elsewhere. Again, the original contractor owes the surety back.
Premium rates for public versus private projects
Public works projects—roads, schools, government buildings—often have bond requirements set by state law or federal regulation. Many states cap the premium rate for these projects. For example, some states limit public works bond premiums to 1 percent of the contract value, regardless of the contractor's credit. This protects public agencies from paying inflated rates.
Private projects have no such cap. A homeowner hiring a contractor to build a deck, or a business owner contracting a renovation, will see whatever rate the surety quotes based on risk. Private premiums can range from 1 to 5 percent or higher if the contractor is high-risk.
Federal projects (those funded by the U.S. government) require bonds under the Miller Act. The surety must be on the U.S. Treasury's list of approved sureties. Premiums are typically 1 to 2 percent, but the surety must meet strict federal standards.
What happens if you cannot afford the bond premium
If the premium is too high, you have a few options. First, shop around. Different sureties price risk differently. A contractor rejected by one surety may be accepted by another at a lower rate. Working with a surety broker—an agent who represents multiple surety companies—can speed this up.
Second, improve your credit before bidding on the project. If you have time, paying down debt and fixing late payments can raise your score and lower the rate you are quoted on the next bond. Even a 50-point increase in credit score can drop your premium by 0.5 percent.
Third, negotiate the contract value with the project owner. If the bond is based on a $500,000 contract and you can reduce the scope to $400,000, the bond premium drops proportionally. This only works if the owner agrees to a smaller project.
If none of these work, you may not be able to take the job. Many projects require bonding by law or by the owner's insurance policy. Proceeding without a bond when one is required exposes you to legal liability and can result in fines or project termination.
How bond premiums are paid and when they are due
The premium is due before the bond is issued. Most sureties require payment within 10 to 30 days of the quote. You pay the surety directly, not the project owner. The surety then issues the bond document, which you submit to the project owner or the government agency overseeing the project.
Some sureties offer payment plans for large premiums, spreading the cost over several months. This is less common than upfront payment, and the surety may charge a small fee for the arrangement. Ask your broker or surety whether this is an option.
The premium is a business expense and is tax-deductible. Keep the receipt and the bond document for your records. If the project is cancelled before you start work, the premium is not refunded—you have paid for the surety's commitment and underwriting, whether or not the bond is used.
Frequently Asked Questions
Can I get a bond if I have bad credit?
Yes, but you will pay a higher premium—often 2.5 to 3 percent or more. Some sureties will not bond contractors with scores below 600 or active collections. If you are denied, try a surety broker who works with high-risk contractors, or wait until you improve your credit before bidding on bonded projects.
Do I get the bond premium back if the project finishes on time with no claims?
No. The premium is non-refundable. You are paying for the surety's may provide and the cost of underwriting and issuing the bond, not for a service you use only if something goes wrong. Think of it like insurance—you pay whether or not you file a claim.
What is the difference between a bid bond and a performance bond?
A bid bond guarantees that you will sign the contract and obtain the performance and payment bonds if you win the bid. It is smaller and cheaper, usually 5 to 10 percent of the bid amount. A performance bond covers the full contract value and guarantees you will finish the work. Most projects require all three.
Who pays the bond premium—the contractor or the project owner?
The contractor pays. The project owner may require bonding as a condition of the contract, but the contractor absorbs the cost. Some contractors add the bond premium to their bid price, passing the cost to the owner indirectly.
Can I switch sureties mid-project?
Switching is difficult and expensive. The original surety must release you, and the new surety must underwrite you and issue a new bond. Most projects do not allow this unless the original surety fails or goes out of business. If you are unhappy with your surety's service, plan to switch for the next project.