What performance and payment bonds are
A performance bond is a may provide that a contractor will finish a job according to the contract terms. A payment bond is a may provide that the contractor will pay workers, suppliers, and subcontractors. Both are issued by a surety company — a third party that promises to cover losses if the contractor fails to perform or pay. They are not insurance; they are a form of credit that protects the project owner and the people working on the job.
Performance bonds typically cover 100% of the contract price. If the contractor abandons the work or fails to meet specifications, the surety either hires another contractor to finish the job or pays the owner the cost difference. Payment bonds typically cover 100% as well and protect workers and suppliers who have no direct contract with the owner. If the contractor doesn't pay them, they can file a claim against the bond instead of suing the contractor.
These bonds are common in public construction projects, where they are often required by law. Private projects may require them too, depending on the contract and the owner's risk tolerance. The contractor pays the surety a premium — usually 1% to 3% of the contract value — to issue the bond.
Key Takeaways
- A performance bond guarantees the contractor will complete the work as specified; a payment bond guarantees workers and suppliers will be paid.
- Both bonds are issued by a surety company, which steps in to cover losses if the contractor fails to perform or pay.
- Public construction projects typically require both bonds by law; private projects may require them depending on the contract.
- The contractor pays a premium to the surety, usually 1% to 3% of the total contract value.
- Claims against a bond must follow specific procedures and timelines, which vary by state and bond type.
How a performance bond protects the project owner
When a performance bond is in place, the project owner has recourse if the contractor stops work, fails to meet deadlines, or delivers substandard work. The owner does not have to sue the contractor directly; instead, they notify the surety of the breach. The surety then investigates and either requires the contractor to fix the problem or arranges for another contractor to complete the work.
If the surety hires a replacement contractor, the cost of completion comes from the bond. If that cost exceeds the bond amount, the original contractor is liable for the difference. This creates a financial incentive for the contractor to perform correctly the first time. The owner is protected from the risk of an incomplete project or the cost of hiring someone else to finish it.
Performance bonds are especially important for large or complex projects where the cost of failure is high. A residential renovation might not require one, but a highway project or a commercial building almost always will.
How a payment bond protects workers and suppliers
A payment bond protects the people who actually do the work or supply materials but have no direct contract with the project owner. If a contractor takes payment from the owner but doesn't pay the subcontractors or material suppliers, those parties can file a claim against the payment bond.
This is especially important in construction, where money flows down a chain: the owner pays the general contractor, who pays subcontractors, who pay their own suppliers. If the general contractor runs out of money or goes bankrupt, workers and suppliers at the bottom of the chain often lose out. A payment bond ensures they have a way to recover what they are owed without waiting for a lawsuit to resolve.
In public construction projects, payment bonds are required by the Miller Act (federal projects) or by state prevailing wage laws. Private projects may include them in the contract, though they are less common unless the owner wants to protect the supply chain.
The difference between performance bonds and other types of bonds
Construction and contracting use several types of bonds, and they serve different purposes. A bid bond guarantees that a contractor who wins a bid will sign the contract and obtain the required performance and payment bonds. It protects the owner during the bidding process. A maintenance bond (or warranty bond) guarantees that the contractor will fix defects that appear after the work is complete, usually for a set period like one year.
A fidelity bond protects against theft or dishonesty by employees or contractors. It is not a performance or payment bond and does not may provide work quality or payment to suppliers. Some contractors carry fidelity bonds to reassure owners that money and materials will not be stolen.
Performance and payment bonds are the most common and most important in construction. They are often required together and issued by the same surety. Bid bonds and maintenance bonds are separate products that may or may not be required depending on the contract and the project type.
Who requires performance and payment bonds
Federal law requires performance and payment bonds on all public construction projects over $100,000. This is the Miller Act requirement. States have their own prevailing wage laws that often require bonds on state and local projects, sometimes at lower thresholds. A city road project or a school renovation will almost certainly require both bonds.
Private projects are not required by law to use bonds, but owners often demand them anyway. A large commercial developer might require bonds on all projects. A homeowner doing a renovation might not. The contract determines whether bonds are required; if the contract says bonds are needed, the contractor must obtain them before work begins.
Some industries outside construction also use performance bonds. Government contracts, service agreements, and supply contracts may require them. The principle is the same: the surety guarantees the contractor will perform or pay, and the owner has recourse if they don't.
How to file a claim against a performance or payment bond
If a contractor fails to perform or fails to pay, the process for claiming against the bond depends on which bond and which state. For a performance bond, the owner typically notifies the surety in writing, describing the breach and requesting the surety to remedy it. The surety has a set time — often 10 to 30 days — to respond. If the surety does not act, the owner may hire a replacement contractor and bill the surety for the cost, up to the bond amount.
For a payment bond, workers and suppliers must follow stricter rules. They usually must send a notice of non-payment to the surety within a specific window, often 90 days from the last date they provided labor or materials. The notice must include the amount owed, the dates of work, and proof of the debt. The surety then investigates and either pays the claim or denies it.
State law varies significantly on these timelines and procedures. Some states require notice to the contractor as well as the surety. Some allow claims only after the contractor has been sued or has gone bankrupt. It is important to understand the rules in your state and to meet all deadlines; missing a deadline can forfeit the claim entirely.
What happens if a claim is denied
A surety can deny a claim if the claimant did not follow the required procedures, missed a deadline, or if the claim falls outside the scope of the bond. For example, if a supplier files a payment bond claim 120 days after their last delivery and the state requires notice within 90 days, the claim will be denied. If a performance bond claim is filed after the contract completion date has passed and the work was never started, the surety may argue the owner waited too long to notify them.
If a claim is denied, the claimant can sue the surety to challenge the denial, but this is expensive and time-consuming. The better approach is to file the claim correctly the first time: meet all deadlines, provide complete documentation, and follow the notice procedures in your state. If you are unsure whether you have a valid claim, contact the surety directly and ask what documentation they need.
The contractor remains liable even if the bond claim is denied or if the bond amount is insufficient to cover the full loss. The owner or claimant can still sue the contractor directly, but collecting from a contractor who is already in financial trouble is difficult. This is why getting the bond right at the start of the project matters.
Frequently Asked Questions
Can a homeowner require a performance bond from a contractor?
Yes. Performance and payment bonds are not limited to public projects. A homeowner can require them in the contract with a contractor, though most residential contractors do not carry bonds because the cost is passed to the homeowner. For large renovations or commercial work, requiring a bond is common and protects you if the contractor abandons the job.
What if the bond amount is less than the cost to finish the work?
The surety pays up to the bond amount, and the contractor is liable for the rest. If a $500,000 project has a $500,000 performance bond and completion costs $600,000, the surety pays $500,000 and the contractor owes $100,000. If the contractor is bankrupt, the owner absorbs the loss. This is why bonds are typically set at 100% of the contract value.
Do I need both a performance bond and a payment bond?
On public projects, yes — both are usually required by law. On private projects, it depends on the contract. A performance bond protects you if the work is not done; a payment bond protects workers and suppliers. If you are the owner, a performance bond is most important to you. If you are a subcontractor or supplier, a payment bond is what protects you.
How long does a payment bond claim take to resolve?
The surety typically has 30 to 60 days to investigate and respond to a claim. If the claim is approved, payment usually follows within 30 days. If the claim is denied, you may have to sue to challenge it, which can take months or years. Meeting all deadlines and providing complete documentation from the start speeds up the process.
Can a contractor get a refund of their bond premium if the project goes smoothly?
No. The bond premium is non-refundable. It is the cost of the surety's may provide, similar to an insurance premium. The contractor pays it once at the start of the project, and it covers the entire contract period. If no claims are filed, the surety keeps the premium.