Bid Bond vs Performance Bond: Complete Contractor Guide 2026
Construction bonds are essential tools that protect project owners and ensure contractor accountability. Understanding the differences between bid bonds and performance bonds—and when each is required—is crucial for contractors pursuing public and private work.
What Are Construction Surety Bonds?
Surety bonds are three-party agreements that provide financial protection:
- Principal: The contractor who obtains the bond
- Obligee: The project owner who is protected
- Surety: The bonding company that guarantees performance
Unlike insurance (which protects the policyholder), surety bonds protect the project owner against contractor default.
Bid Bonds Explained
Purpose of Bid Bonds
Bid bonds guarantee that a contractor will:
- Honor their bid price if selected
- Enter into a contract as proposed
- Provide required performance and payment bonds
If a contractor withdraws after being awarded a project or fails to provide subsequent bonds, the bid bond provides compensation to the owner.
When Bid Bonds Are Required
Bid bonds are commonly required for:
- Federal projects over $150,000 (mandated by the Miller Act)
- State and municipal projects (per Little Miller Acts)
- Many private commercial projects
- Institutional work (schools, hospitals, universities)
Bid Bond Amounts
Bid bonds typically range from 5% to 20% of the bid amount:
| Project Type | Typical Bid Bond Amount | |--------------|------------------------| | Federal | 20% of bid | | State/Municipal | 5-10% of bid | | Private Commercial | 5-10% of bid | | Design-Build | 10-20% of bid |
Bid Bond Costs
Bid bonds are usually free or low-cost for contractors with established bonding relationships. Sureties provide them as a service to facilitate performance bond opportunities.
Performance Bonds Explained
Purpose of Performance Bonds
Performance bonds guarantee that a contractor will:
- Complete the project according to contract specifications
- Meet quality standards
- Finish within the required timeframe
If a contractor defaults, the surety either completes the work or pays the owner for completion costs.
When Performance Bonds Are Required
Performance bonds are required for:
- All federal projects over $150,000
- Most public works projects at state and local levels
- Many private projects especially institutional and commercial
- Subcontractor work when required by general contractors
Performance Bond Amounts
Performance bonds are typically set at 100% of the contract value, providing full protection for the project owner.
Performance Bond Costs
Performance bond premiums are calculated as a percentage of the contract amount:
| Contractor Experience | Typical Rate | |----------------------|--------------| | Established with strong financials | 0.5-1.5% | | Mid-tier contractors | 1.5-2.5% | | Newer contractors | 2.5-3.5% | | Higher-risk situations | 3%+ |
For a $1 million project, premiums typically range from $5,000 to $25,000.
Payment Bonds: The Third Bond Type
While not the focus of this comparison, payment bonds often accompany performance bonds:
- Purpose: Guarantee payment to subcontractors and suppliers
- Protection: Covers those who provide labor and materials
- Requirement: Required alongside performance bonds on federal and most public projects
Key Differences: Bid Bond vs Performance Bond
| Aspect | Bid Bond | Performance Bond | |--------|----------|------------------| | When required | During bidding | After contract award | | What it guarantees | Bid commitment | Project completion | | Typical amount | 5-20% of bid | 100% of contract | | Cost to contractor | Usually free | 0.5-3.5% of contract | | Duration | Until contract execution | Until project completion | | Claim trigger | Bid withdrawal | Contractor default |
How to Obtain Construction Bonds
Establishing a Bonding Relationship
Sureties evaluate contractors based on:
The Three C's of Bonding:
- Character: Your reputation and track record
- Capacity: Ability to perform the work
- Capital: Financial strength and resources
Documentation Required
Prepare these materials when seeking bonding:
- Business financial statements (CPA-reviewed or audited)
- Personal financial statements of owners
- Work-in-progress reports
- Banking references
- Equipment and resource lists
- Resume of key personnel
- Completed project history
Building Bonding Capacity
To increase your bonding limits:
- Maintain clean financials with working capital reserves
- Complete projects successfully to build track record
- Develop relationships with surety agents
- Start with smaller bonds and grow gradually
- Keep accurate job costing to demonstrate project control
Common Bonding Challenges
New Contractor Limitations
New contractors often struggle to obtain bonds due to:
- Limited project history
- Insufficient working capital
- No established surety relationships
Solutions:
- Start with small municipal projects
- Consider SBA surety bond guarantee program
- Build capital through profitable smaller projects
- Document all successful work carefully
Financial Statement Issues
Sureties require strong financials. Common problems include:
- Underbilling that inflates apparent profit
- Poor cash flow management
- Excessive debt levels
- Insufficient working capital
Minimum benchmarks:
- Working capital at least 10% of annual revenue
- Debt-to-equity ratio below 3:1
- Positive retained earnings trend
Personal Guarantees
Most surety agreements require personal indemnity from company owners. This means:
- Personal assets are at risk if the company defaults
- Owners must maintain adequate personal net worth
- Joint and several liability applies to all indemnitors
Bond Claims: What Happens When Things Go Wrong
Bid Bond Claims
If you're awarded a project and fail to proceed:
- Owner notifies surety of your default
- Surety investigates the circumstances
- If claim is valid, surety pays the difference between your bid and the next acceptable bid
- Maximum payout is the bond amount
- Surety seeks reimbursement from you
Performance Bond Claims
If you default during construction:
- Owner provides notice of default
- Surety investigates and may attempt cure
- Surety options include:
- Financing you to complete the work
- Hiring another contractor
- Paying owner to complete the work
- Surety seeks recovery through indemnity agreement
Tips for Successful Bonding
For Bid Bonds
- Have your surety pre-approve bonding before pursuing projects
- Keep your surety informed of upcoming bid opportunities
- Allow adequate time for bond issuance before deadlines
- Maintain good communication with your surety agent
For Performance Bonds
- Bid only projects within your bonding capacity
- Notify surety promptly of any project issues
- Maintain detailed project documentation
- Address problems early before they escalate
Conclusion
Understanding bid bonds and performance bonds is essential for contractors pursuing bonded work. While bid bonds open the door to project opportunities, performance bonds provide the guarantee that builds owner confidence and enables contract awards.
Invest time in building strong surety relationships and maintaining the financial position that supports your bonding needs. The ability to provide competitive bonds gives you access to better projects and more stable clients.
For help finding bonded project opportunities, explore construction bid discovery tools that connect you with public and private opportunities matching your capabilities.
