Overview
A performance bond guarantees that a contractor will finish a project on the terms of the contract. The owner or general contractor (the obligee) requires it so the risk of a contractor defaulting, going insolvent, or walking off the job moves onto a surety. If the contractor defaults, the surety steps in to arrange completion, fund a replacement contractor, or pay the obligee's loss up to the bond amount (the penal sum).
Most public construction requires a performance bond. Federal projects are bonded under the Miller Act, and state and local work is bonded under the state equivalents, often called Little Miller Acts. Private owners frequently require one as well. The bond amount usually equals 100 percent of the contract value, and underwriting reviews the contractor's credit, financial strength, working capital, and track record on similar work.
A performance bond is a three-party guarantee among the contractor (the principal), the owner (the obligee), and the surety. It is not insurance on the contractor's own losses. If the surety pays a claim, the contractor reimburses it under the indemnity agreement, so the bond functions as a credit instrument that backs the promise to perform.
Who needs this bond
General contractors and subcontractors on public works, federal projects bonded under the Miller Act, and private commercial work where the owner requires one.
Typical amount and term
Bond amount usually equals 100 percent of the contract value. Premium runs about 1 to 3 percent of the bond amount per year for well-qualified contractors, scaled by contract size and financial strength.
What this bond costs
Your premium is a small percentage of the bond amount, set by underwriting. The biggest drivers:
- The contract value, since the bond amount usually equals 100 percent of it
- Personal and business credit of the owners
- Working capital and the quality of the financial statements
- The contractor's backlog and single-job and aggregate capacity
- Project type, duration, and complexity
| Scenario | Bond amount | Estimated premium |
|---|---|---|
| Established contractor, strong financials | $500,000 contract | around 1 to 2 percent of the bond amount |
| Smaller contractor, solid credit | $100,000 contract | around 2 to 3 percent of the bond amount |
| Large or complex project | $5,000,000 contract | often under 1.5 percent on a tiered rate |
Figures are illustrative premium ranges, not quotes or statutory amounts. Your rate depends on the bond amount your obligee requires and your underwriting profile.
What you will need
- Completed surety questionnaire and recent CPA-prepared business financials
- Personal financial statements for owners with 10 percent or greater interest
- Work in progress schedule and bank line of credit confirmation
- Reference letters from suppliers, subcontractors, and prior obligees
How to apply
- Request a quote with the contract size, scope, and obligee details
- Send the underwriting package (financials, work in progress, references)
- Receive approval and a consent of surety, usually within 1 to 3 business days
- Performance and payment bonds issued at award and filed with the obligee
How a surety bond differs from insurance
A performance bond guarantees your performance to the owner; it does not pay your own losses. Builder's risk and general liability insurance cover your project and accident exposures. If you default and the surety pays the owner, you repay the surety, so the bond is a guarantee backed by your indemnity, not a transfer of your own risk like an insurance policy.
Frequently asked questions
What does a performance bond cost?
Premium is a percentage of the bond amount, usually 1 to 3 percent for well-qualified contractors, lower on larger programs. Rate depends on credit, financial strength, and the size of the job. The figures here are illustrative, not a quote.
How is the bond amount set?
Almost always at 100 percent of the contract value. The obligee sets the requirement in the contract or solicitation.
Is a performance bond the same as a payment bond?
No. A performance bond guarantees you complete the work. A payment bond guarantees your subcontractors and suppliers are paid. Public projects usually require both, issued together.
What happens if a contractor defaults?
The obligee calls the bond. The surety investigates and, if the default is valid, arranges completion, funds a replacement contractor, or pays the loss up to the bond amount, then seeks reimbursement from the contractor.
More contract bonds
Reviewed by the Cornerstone Surety bond team. Last reviewed 2026-06-17.