A performance bond and a payment bond are two separate guarantees that a contractor will finish a job and pay suppliers and workers
A performance bond is a written promise from a bonding company that a contractor will complete a project according to the contract terms. If the contractor abandons the work or fails to finish it properly, the bonding company pays the project owner to hire someone else to complete it. A payment bond is a separate may provide that the contractor will pay all suppliers, workers, and subcontractors involved in the project. If the contractor doesn't pay them, the bonding company covers those unpaid bills instead.
These bonds are not insurance for the contractor—they protect the project owner and the people who supply labor and materials. The contractor pays a premium (usually 1 to 3 percent of the contract value) to the bonding company to issue the bonds. If a claim is filed against the bond, the contractor must repay the bonding company for whatever it paid out.
Performance and payment bonds are required by law on most public construction projects—federal, state, and local government work. Private projects may require them depending on the contract, the lender's requirements, or the project owner's preference. The bonds are issued by surety companies, which are licensed to underwrite these guarantees in each state.
Key Takeaways
- A performance bond guarantees the contractor will finish the project as specified; a payment bond guarantees suppliers and workers will be paid.
- Public construction projects almost always require both bonds by law; private projects may require them depending on the contract or lender.
- The contractor pays the premium to the bonding company and is responsible for repaying any claims paid out against the bonds.
- A claim against either bond must be filed within a set time window, which varies by state and bond type but is often one to three years after the project ends.
How a performance bond protects the project owner
When a contractor is bonded, the project owner has a financial safety net if the work stops or is done incorrectly. If the contractor walks away from the job, goes bankrupt, or simply refuses to fix defects, the project owner can file a claim with the bonding company. The bonding company then either pays the contractor to finish the work or pays the project owner directly to hire a replacement contractor.
The bonding company investigates the claim before paying. It will review the contract, inspect the work, and ask the contractor for their side of the story. If the claim is valid, the bonding company covers the cost of completion up to the full contract amount. The project owner does not have to sue the contractor or wait years for a court judgment—the bonding company's obligation is to resolve the claim within a defined timeframe, usually 30 to 90 days.
This protection is especially important on large or long-term projects where the cost of delay or poor work is high. A homeowner hiring a contractor for a kitchen remodel might not require a bond; a city hiring a contractor to build a bridge almost certainly will.
How a payment bond protects workers and suppliers
A payment bond ensures that everyone who contributes to a project—carpenters, electricians, concrete suppliers, equipment rental companies—gets paid even if the contractor runs out of money or disappears. Without a payment bond, a supplier or worker who is not paid has to sue the contractor, which is expensive and often fruitless if the contractor is insolvent.
Workers and suppliers do not have to be named in the contract to file a claim. They can file directly against the payment bond if they are not paid within a set time (often 30 to 60 days after their last work or delivery). The bonding company investigates and pays valid claims up to the contract amount.
Payment bonds are required on all federal construction projects over $100,000 and on most state and local public projects. The threshold varies by state—some require bonds on projects as small as $25,000. Private projects may not require a payment bond unless the contract specifies one or the lender demands it.
The difference between performance and payment bonds
| Aspect | Performance Bond | Payment Bond |
|---|---|---|
| Protects | The project owner | Workers, suppliers, and subcontractors |
| Covers | Cost of completing unfinished or defective work | Unpaid wages, materials, and services |
| Claim filed by | Project owner | Worker or supplier |
| Typical claim window | 1 to 3 years after project completion | 1 to 3 years after project completion (varies by state) |
| Required on public projects | Yes, almost always | Yes, almost always |
The two bonds work together but serve different purposes. A contractor might complete the work on time and to spec (satisfying the performance bond) but still fail to pay suppliers (triggering the payment bond). Conversely, a contractor might pay everyone but abandon the project halfway through (triggering the performance bond but not the payment bond). Both bonds are usually required together on public work to cover both risks.
Who issues bonds and how to verify one
Performance and payment bonds are issued by surety companies—insurance-like firms licensed to underwrite construction bonds in each state. Major sureties include Travelers, Zurich, Liberty Mutual, and Fidelity & Deposit, though many regional and specialty sureties also operate. The surety investigates the contractor's financial health, experience, and track record before issuing a bond.
If you are a project owner or supplier, you can verify that a bond exists by asking the contractor for a copy of the bond document. The bond will list the surety company, the bond amount (usually equal to the contract price), the contractor, the project owner, and the effective dates. You can also contact the surety directly using the phone number on the bond to confirm it is active.
If a contractor claims to be bonded but cannot produce a bond document, do not proceed. A legitimate bond is a physical document issued by a licensed surety, not a verbal promise or a certificate the contractor printed themselves.
What happens when a claim is filed
The process for filing a claim varies slightly between sureties and states, but the basic steps are the same. The claimant (project owner, worker, or supplier) notifies the surety in writing, usually within 30 to 90 days of discovering the problem. The notification should include the contract details, proof of the loss (invoices, timesheets, photos of unfinished work), and documentation that the contractor was given a chance to fix the problem or pay the debt.
The surety then investigates. It will contact the contractor, review the contract and project records, and may inspect the work. If the claim is valid, the surety pays the claimant or the project owner (depending on which bond is involved) up to the bond limit. If the claim is disputed, the surety may require the claimant to pursue a lawsuit, though this is less common on public projects where the bond terms are standardized.
Once a claim is paid, the contractor is obligated to repay the surety. If the contractor cannot repay, the surety absorbs the loss and may refuse to bond the contractor again. This creates a strong incentive for contractors to stay bonded and maintain their reputation with sureties.
Bonds on public versus private projects
Public construction projects—work done for federal, state, or local government—almost always require both performance and payment bonds. Federal projects over $100,000 are required by the Miller Act to have payment bonds; performance bonds are required by most government contracts as well. State and local governments have their own thresholds and requirements, but the expectation is the same: the contractor must be bonded.
Private projects have more flexibility. A homeowner hiring a contractor for a renovation may not require a bond at all. A commercial developer financing a large building may require bonds as a condition of the construction loan. The decision depends on the contract, the lender's requirements, and the project owner's risk tolerance. If bonds are required on a private project, the contract will specify which bonds and in what amounts.
If you are contracting work and bonds are not mentioned, you can request them. A contractor who is bonded and willing to be bonded is generally a lower-risk choice than one who refuses or cannot obtain a bond.
Frequently Asked Questions
Can a homeowner require a performance and payment bond from a contractor?
Yes. There is no law preventing a homeowner from requiring bonds on a private project. Whether the contractor will agree depends on the project size and the contractor's bonding capacity. Larger contractors are more likely to have bonding available; very small contractors may not be able to obtain bonds for small residential jobs.
What if the bonding company goes out of business?
Surety companies are regulated by state insurance departments and must maintain reserves to cover outstanding bonds. If a surety fails, the state insurance commissioner typically arranges for another surety to take over the bonds or ensures claims are paid from the failed surety's reserves. This is rare but has happened; claimants are protected by state law.
How much does a performance and payment bond cost?
The contractor pays a premium to the bonding company, typically 1 to 3 percent of the contract value. The exact rate depends on the contractor's credit, experience, and the surety's assessment of risk. A contractor with a strong track record and good financials pays less; a new or struggling contractor pays more.
Can I file a claim if the contractor did the work but did it badly?
Yes, if the work does not meet the contract specifications. The performance bond covers defective work as well as incomplete work. You will need to document how the work failed to meet the contract terms—photos, inspection reports, or expert assessments help. The surety will investigate and determine whether the contractor should fix it or pay for repairs.
How long do I have to file a claim after a project ends?
The claim window varies by state and bond type, but is typically one to three years after the project completion date. Some states allow longer periods for payment bond claims. Check your bond document or contact the surety for the exact deadline in your state; missing the deadline usually bars the claim.