The contractor or supplier pays the bond premium; the project owner requires it but does not pay
A payment bond guarantees that a contractor will pay their subcontractors and material suppliers. A performance bond guarantees that the contractor will finish the work as promised. In both cases, the contractor — the party doing the work — pays the bond premium to a surety company. The project owner (the person or company hiring the contractor) does not pay the bond cost directly, but they do require the bond as a condition of the contract.
The contractor builds the bond cost into their bid. When you hire a contractor and they quote you a price, that price already includes what they expect to spend on bonding. The surety company that issues the bond is a third party — not the contractor and not the owner — and they collect the premium upfront.
Key Takeaways
- The contractor pays the bond premium to the surety company, not the project owner.
- The project owner requires the bond but does not write a separate check for it; the contractor's bid price includes the bonding cost.
- A payment bond protects subcontractors and suppliers; a performance bond protects the owner if the contractor fails to finish the work.
- Bond premiums typically range from 0.5% to 3% of the contract value, depending on the contractor's credit history and the project risk.
- If a contractor cannot obtain a bond, they may be ineligible for the project or may need to post cash collateral instead.
How the contractor's cost flows into your project price
When a contractor bids on a job, they calculate all their costs: labor, materials, equipment, overhead, and profit. They also calculate what the surety company will charge them for the bond. That total becomes your quote. You are not paying the surety directly; you are paying the contractor, and the contractor pays the surety out of the money you give them.
This is why competitive bidding matters. A contractor with a strong credit history and a track record of completed projects will pay a lower bond premium than a contractor with financial problems or a short history. The lower premium means a lower bid to you. A contractor who cannot get bonded at all may not be able to bid on the project, or they may ask you to accept a letter of credit or cash deposit instead.
What the payment bond covers and who it protects
A payment bond is a promise that the contractor will pay all subcontractors, laborers, and material suppliers. If the contractor goes unpaid or goes out of business mid-project, the surety company steps in and pays the people who did the work. This protects your subcontractors and suppliers — not you directly.
However, you benefit indirectly. If subcontractors and suppliers are not paid, they can file a lien against your property, which clouds the title and makes it hard to sell or refinance. A payment bond prevents that. It also means subcontractors are more likely to show up and finish their work, because they know they will be paid by the surety if the contractor fails.
Payment bonds are required on most public construction projects (government-funded work) and on many private projects above a certain dollar threshold. The threshold varies by state and by the type of work.
What the performance bond covers and who it protects
A performance bond is a promise that the contractor will finish the work according to the contract specifications and timeline. If the contractor abandons the job, does shoddy work, or misses the deadline without cause, the surety company will either hire another contractor to finish the work or pay you the cost difference if you have to hire someone else.
The performance bond protects you, the project owner. It is your insurance that the work will be completed. If the contractor walks off the job, you do not have to chase them through court; you file a claim with the surety, and the surety pays to get the work finished.
Like payment bonds, performance bonds are standard on public projects and common on large private projects. They are less common on small residential jobs, though some homeowners and lenders require them.
How bond premiums are calculated and what affects the cost
The surety company charges a percentage of the contract value as the bond premium. That percentage — called the rate — typically ranges from 0.5% to 3%, depending on several factors. A contractor with excellent credit, a long history of completed projects, and strong financial statements will pay a lower rate. A contractor with weak credit, few completed projects, or financial red flags will pay a higher rate or may be denied bonding altogether.
The type of work also affects the rate. Routine work like painting or landscaping is lower risk than specialized work like electrical or structural steel, so the rate is lower. The project location and the contractor's experience in that location also matter. A contractor bonding their first job in a new state may pay more than a contractor with a track record there.
The surety company also considers the project timeline. A tight deadline increases risk, so the rate may be higher. They also look at the owner's financial stability and payment history — if you have a reputation for paying late or disputing invoices, the surety may charge more or decline to bond the job.
What happens if the contractor cannot get bonded
If a contractor cannot obtain a bond from a surety company, they have a few options. They can ask you to accept a letter of credit from their bank instead, which serves a similar purpose but comes from a financial institution rather than a surety. They can post a cash deposit equal to a percentage of the contract value, which you hold as collateral. Or they can simply be ineligible for the project if bonding is a requirement.
If you are considering a contractor who cannot get bonded, ask why. A contractor with a solid track record should be able to get bonded, even at a higher rate. If they cannot, it may signal financial distress or a history of disputes with surety companies. That is a red flag worth investigating before you sign a contract.
Payment and performance bonds on public versus private projects
Public projects — those funded by federal, state, or local government — almost always require both payment and performance bonds. Federal projects are governed by the Miller Act, which mandates payment bonds on contracts over $100,000. State and local governments have their own thresholds and requirements, which vary widely.
Private projects are not required by law to use bonds, but many owners require them anyway, especially on large or complex jobs. Lenders often require performance bonds as a condition of financing. Developers and general contractors typically require subcontractors to be bonded. The threshold for requiring bonds on private work varies by owner, lender, and industry practice.
Residential projects — single-family homes and small renovations — rarely require bonds, though some homeowners and all-in-one lenders do ask for them. If you are hiring a contractor for a residential job and bonding is not mentioned, it is usually not required.
Frequently Asked Questions
Can I require a bond even if the contract does not mention one?
Yes. You can add a bonding requirement to any contract before you sign it. The contractor will need to obtain the bond before work starts, which takes a few days to a week. If the contractor cannot get bonded, you will know before you commit to them. Adding this requirement protects you if the contractor fails to finish or pay their subs.
What if the contractor's bid does not include the bond cost?
Ask them directly whether bonding is included in their price or if it will be added. If they say it will be added, get a written quote for the bond cost before you sign. Some contractors try to hide the bond cost and then charge it separately after the contract is signed. A written bid should spell out all costs upfront.
Who do I contact if the contractor does not pay their subcontractors?
The subcontractor or supplier files a claim with the surety company named on the payment bond. You do not file the claim — the unpaid party does. However, if you receive a lien notice from a sub, you should notify the contractor and the surety immediately. The surety will investigate and pay valid claims.
Does the bond cover defective work or cost overruns?
A performance bond covers failure to complete the work or abandonment, not defective work or cost overruns. If the contractor finishes the job but does poor work, the bond does not pay; you would need to pursue a warranty claim or sue for breach of contract. If the contractor goes over budget, that is a contract dispute, not a bond claim.
Can a contractor use the same bond for multiple projects?
No. Each project requires its own bond. A contractor may have a bonding line of credit that allows them to issue multiple bonds up to a total limit, but each project gets a separate bond document. The surety tracks the contractor's total bonded work to make sure they do not exceed their bonding capacity.