Surety Bonds for Contractors: What They Are, What They Cost, and How to Get One

​Three parties are involved in every surety bond: you (the principal), the party requiring the bond (the obligee), and the bonding company (the surety). The surety is essentially vouching for you. They have reviewed your financials, credit, and track record and are willing to put their money on the line to guarantee your performance. If you fail and the surety has to pay a claim, you owe them that money back. This is the critical distinction between a bond and insurance. Insurance covers losses. A bond creates an obligation you are financially responsible for if things go sideways.

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The obligee is whoever is requiring the bond. For public construction projects, the obligee is typically a government agency. For a contractor's license, the obligee is your state licensing board. For private commercial work, it might be a general contractor or a property owner requiring a bond before they sign a contract with you. For more information on license requirements, check out our full guides on contractor licensing by state.

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The Four Types of Contractor Surety Bonds

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Bid Bonds

A bid bond guarantees that if you win a competitive bid, you will actually sign the contract and provide the required performance and payment bonds. It protects the project owner from a contractor who wins a bid and then backs out, forcing the owner to re-bid the project at a higher price. The bid bond covers that cost difference. Bid bond amounts are typically 5 to 10 percent of the total contract value, and they are standard on public construction projects. If you want to compete for public contracts, you need a surety relationship in place before the bid goes out.

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Performance Bonds

A performance bond guarantees that you will complete the project according to the contract terms. If you default, the surety is obligated to either finance the project to completion, hire another contractor to finish, or pay the owner the cost of getting the work done. For federal contracts, performance bond amounts are set at 100 percent of the original contract price. Most state and local public contracts follow the same standard. Private commercial projects that require performance bonds typically follow the same 100 percent benchmark.

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Payment Bonds

A payment bond runs parallel to the performance bond and guarantees that your subcontractors, laborers, and material suppliers will be paid. This is critical on public projects because subcontractors on government work cannot file a mechanics lien against public property. The payment bond is their financial protection instead. On federal contracts, payment bond amounts are also set at 100 percent of the contract price. Most states have adopted similar requirements for state-funded projects, often called "little Miller Acts" modeled after the federal statute.

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License and Permit Bonds

A license bond is a condition of your contractor's license, not tied to any specific project. The licensing board is the obligee, and the bond guarantees you will comply with state laws, building codes, and licensing requirements. If a complaint is filed and validated against you, a claim can be made on your license bond. Bond amounts for contractor licenses vary widely by state and trade, ranging from as low as $5,000 to $25,000 or more for larger license classifications. This is the type of bond most small contractors encounter first.

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When You Are Required to Have a Surety Bond

The Miller Act requires performance and payment bonds on all federal construction contracts valued above $150,000. Below that threshold, agencies have discretion to use alternative forms of security. Nearly every state has adopted parallel legislation for state-funded public works, commonly called "little Miller Acts," with similar bonding thresholds that vary by state.

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Most state contractor licensing boards require a license bond as a condition of licensure. Some states have low thresholds: California requires a $25,000 contractor's license bond regardless of license classification. Others scale the requirement to the type or volume of work. If your state licenses contractors, there is almost certainly a bond requirement attached. See our full guide on contractor license requirements by state for more information.

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Private commercial contracts are a different matter. No law forces a private project owner to require a bond, but many GCs and commercial clients require performance and payment bonds as a standard contract condition, particularly on larger projects. If you want to work in commercial construction above a certain dollar threshold, having a bonding relationship established before a client asks for one puts you ahead of the contractors who do not.

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What Surety Bonds Cost

Surety bond premiums are calculated as a percentage of the bond amount, not the contract value. For a license bond, that percentage is applied to the face amount of the bond your state requires. For a performance or payment bond, it is applied to the contract price.

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For contractors with solid credit and a clean financial history, premium rates on performance and payment bonds typically run between 1 and 3 percent of the bond amount. A contractor bonding a $500,000 public works project at a 2 percent rate pays $10,000 for the bond. A contractor with a weaker credit profile or limited track record will pay on the higher end of that range or may require an SBA bond guarantee to qualify at all.

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License bond premiums are much lower in actual dollar terms because the bond amounts are smaller. A $25,000 license bond at a 1.5 percent rate costs $375 per year. A $10,000 bond at the same rate costs $150.

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The factors that drive your rate up or down include your personal and business credit score, your years in business, your financial statements, your backlog relative to your working capital, and your claims history. A contractor with a strong track record and clean credit gets the best rates. A newer contractor or one with a prior bond claim pays more.