What Is a Performance Bond?
A performance bond is a type of contract surety bond that guarantees a contractor will complete a construction project in accordance with the contract's terms and conditions. If the contractor fails to perform — through default, abandonment, or inability to finish — the surety steps in to ensure the project is completed, either by financing the original contractor, hiring a replacement, or compensating the owner up to the bond amount.
It is not insurance for the contractor. The bond protects the project owner, and if the surety pays anything, the contractor must repay it. That's why sureties underwrite performance bonds carefully and issue them only to contractors they believe can finish the job.
When Is a Performance Bond Required?
Performance bonds are most commonly required on:
- California public works — Public agencies routinely require a performance bond in their contract documents, usually for 100% of the contract price. State law separately requires a payment bond on public works contracts over $25,000 (Civil Code § 9550), for not less than 100% of the contract amount (§ 9554).
- Federal projects — The Miller Act requires performance and payment bonds on federal construction contracts exceeding $150,000 (FAR 28.102-1).
- Private projects — Private owners, developers, and lenders often require performance bonds to protect their investment.
On public work, the performance bond usually comes after a bid bond: the bid bond guarantees you'll sign the contract and provide the final bonds if you win.
How Performance Bonds Work
A performance bond involves three parties:
- Principal — the contractor who purchases the bond and performs the work
- Obligee — the project owner protected by the bond
- Surety — the company that guarantees the contractor's performance
The bond amount is typically 100% of the contract value. Performance bonds are almost always issued alongside a payment bond, which guarantees payment to subcontractors and suppliers.
What Happens If There's a Claim?
- The owner declares a default under the contract and notifies the surety.
- The surety investigates whether the default is valid and what it will take to finish the work.
- If the claim is valid, the surety typically either helps the original contractor finish, arranges for another contractor to complete the project, or pays the owner's damages up to the bond amount.
- The contractor repays the surety for its costs under the indemnity agreement signed when the bond was issued.
How Long Does a Performance Bond Last?
A performance bond stays in force for the life of the contract, until the work is completed and accepted. Many contracts also keep it in place through a warranty or maintenance period, so check your contract documents for the exact term.
Bidding Bigger Projects?
Contractors who want to bid on larger public and private projects need a strong surety relationship. We help contractors build bonding capacity so you can pursue the jobs that grow your business.
How Contractors Qualify
Because a performance bond guarantees completion of the entire project, underwriting is more thorough than for a license bond. Surety companies evaluate what the industry calls the "three Cs":
- Capital — your financial strength and working capital
- Capacity — your ability to perform the work (experience, equipment, staff)
- Character — your reputation and track record
What You'll Typically Need
- Recent CPA-prepared financial statements for the business
- A work-in-progress schedule showing your current jobs
- A list of completed projects similar in size and type
- Bank line of credit information
- The contract or bid documents for the job being bonded
Does Credit Matter?
Yes. Sureties review the owners' personal credit, especially for smaller contractors. As bonding needs grow, financial statements and track record carry more of the weight. As a former underwriter, our agency knows how to present your qualifications clearly to the surety.
How Much Does a Performance Bond Cost?
You pay a premium based on the contract amount, not the full bond. The rate depends on your financial strength, experience, credit, and the size and type of the project, and many sureties charge a lower percentage on larger contract amounts. We submit your application to several surety companies, and each sets its own rate, so the premium isn't set until you're approved.
Why Work With Advanced Surety?
Contract surety is a specialized field. We work with admitted surety companies that actively write construction bonds, and we can place the bid, performance, and payment bonds for the same job. Whether you're bonding your first project or expanding your capacity for larger jobs, we help you get there.