A project owner or GC asks for a bond before they'll award the contract. You know it's something to do with guaranteeing the work, but the terms (bid bond, performance bond, payment bond) aren't always clear.
This guide covers what a surety bond actually is, the main types contractors encounter, how they differ from insurance, and what's typically required on commercial and public projects.
What Is a Surety Bond?
A surety bond is a three-party contract between the principal (you, the contractor), the obligee (the project owner or government body requiring the bond), and the surety (the company issuing the bond).
The bond guarantees you'll fulfil your contractual obligations. If you don't, the obligee files a claim against the bond and the surety pays. Per NASBP's surety definition, the surety is then obligated to either find a replacement contractor, finance completion, or compensate the project owner directly, depending on the bond type and the nature of the default.
Here's the part most contractors miss: the surety will seek reimbursement from you after paying a claim. A bond is not risk transfer the way insurance is. It's closer to a line of credit backed by your financial standing. The surety is betting you'll perform. If you don't, you're still on the hook.
The Four Main Types of Contractor Bonds
Each bond type protects a different party at a different stage of a project.
Bid bond. Guarantees you'll sign the contract if you win the job and provide the required follow-up bonds. Protects the project owner from contractors who bid low and walk away. If you win and don't follow through, the surety pays the owner the difference between your bid and the next lowest qualified bidder. Bid bonds are typically 5–10% of the bid value.
Performance bond. Guarantees you'll complete the project to the terms of the contract. If you default (walk off the job, miss specifications, or run into financial trouble that stops the work), the surety steps in. Usually issued at 100% of contract value.
Payment bond. Guarantees your subcontractors and suppliers get paid. Protects the project from mechanic's liens and unpaid labour disputes. Almost always issued alongside the performance bond, also at 100% of contract value.
License and permit bond. Required by state or local licensing authorities to operate as a contractor. It guarantees you'll comply with regulations, not that you'll complete any specific project. Most contractor licensing boards require one before they'll issue or renew a license.
| Bond Type | Who It Protects | When It's Required | Typical Bond Amount |
|---|---|---|---|
| Bid bond | Project owner | At bid submission | 5–10% of bid value |
| Performance bond | Project owner | At contract award | 100% of contract value |
| Payment bond | Subcontractors and suppliers | At contract award | 100% of contract value |
| License and permit bond | Consumers and regulators | For licensing or permits | Varies by state and license type |
Surety Bond Construction: When Bonds Are Required
Bond requirements vary by project type, size, and jurisdiction. Here are the four situations that consistently trigger them:
- Federal contracts over $150,000. The Miller Act requires bid, performance, and payment bonds on all federal construction contracts at or above this threshold. No exceptions.
- State and municipal contracts. Most states have enacted Little Miller Act equivalents that mirror federal requirements for state and local government work. Thresholds vary by state but typically sit between $50,000 and $150,000.
- Private commercial projects. Increasingly, private developers and large GCs require bonds on commercial projects above $500,000, particularly where lenders are involved.
- Contractor licensing. Most state contractor licensing boards require a license and permit bond before issuing or renewing a contractor's license, regardless of project size.
If you're bidding public work for the first time, confirm the bonding requirements with the issuing authority before submitting. Missing a bond requirement at bid stage typically means disqualification.
Contractor Surety Bond vs. Insurance: Not the Same Thing
The clearest way to frame this: insurance protects your business; a surety bond protects the project owner.
Insurance is a two-party contract between you and your carrier. When a covered claim occurs, the carrier absorbs the loss. You don't owe them back. Your general liability insurance covers third-party bodily injury and property damage claims that arise from your operations. That coverage exists for your benefit.
A surety bond is a three-party guarantee. When a bond claim is paid, you owe the surety back. The bond exists for the project owner's benefit, not yours.
| Surety Bond | Insurance | |
|---|---|---|
| Parties involved | Three: principal, obligee, surety | Two: insured and carrier |
| Who is protected | The obligee (project owner or regulator) | The insured (you) |
| After a claim is paid | Surety seeks reimbursement from contractor | Carrier absorbs the loss |
| Underlying basis | Credit and financial capacity | Risk pooling across policyholders |
For contractors, the answer to "bond or insurance?" is almost always both. They cover different exposures and different parties. Most public contracts and a growing number of private ones require evidence of both before work can begin.
How to Get a Contractor Bond
Surety companies underwrite bond applicants the way a lender would. They're extending their financial backing, so they want confidence you can perform.
Key factors in the underwriting review:
- Personal credit score (700+ is the standard threshold for most contract bonds)
- Business financial statements, typically two to three years
- Years in operation and relevant project experience
- Current project backlog and capacity
- Claims history on prior bonded projects
License bonds are generally easier to obtain than contract bonds. Smaller bond amounts and lower project risk mean less underwriting scrutiny. Contract bonds, performance and payment bonds especially, require a stronger financial profile.
The process runs through a surety broker. You apply, provide documentation, and the surety establishes a bond facility with a set capacity. That capacity determines the maximum contract value you can bond at any given time.
Contractors getting bonded for the first time often find they need to confirm their full coverage program is in order at the same time. Confirming your workers comp coverage and general liability limits are adequate for the project scope is typically part of the same conversation.
Get Your Bond and Coverage Program Sorted Before the Contract Award
Whether you're pursuing your first bonded project or building a surety facility for ongoing public work, the time to sort your bonds and coverage is before the bid goes in, not after you've won.
Speak to our team to confirm what bonds your next project requires and make sure your full coverage program is in order.
