Bid Bond vs. Performance Bond: Complete Guide for Contractors (2026)

Quick Reference

What Is a Bid Bond?

A bid bond is submitted with a construction contract bid to confirm that the bid is genuine and financially backed. It guarantees to the project owner (obligee) that:

• The contractor’s bid reflects a real commitment to perform the work at that price if selected
• The contractor can obtain final performance and payment bonding if their bid is accepted
• If the contractor wins the bid but refuses to enter into the contract, the surety will compensate the project owner for the difference between the contractor’s bid and the next lowest qualified bid

How the Bid Bond Penalty Works

Most bid bonds are issued for a fixed percentage of the bid price — typically 5–10% — or for a stated dollar amount. This is the “penalty” the surety will pay if the contractor fails to honor their bid.

Example: A contractor bids $1,000,000 on a school renovation project. The owner requires a bid bond equal to 10% of the bid. If the contractor wins the bid and refuses to sign the contract, and the next lowest qualified bid is $1,080,000, the surety pays the owner $80,000 (the difference) — up to the $100,000 bond penalty.

What Is a Performance Bond?

A performance bond is issued after a contract is awarded. It guarantees that the contractor will complete the project in full compliance with the contract documents — on schedule, within budget, and to the required quality standards.

If the contractor defaults — stops work, becomes insolvent, or fails to perform — the project owner can make a claim against the performance bond. The surety then has three typical options:

• Finance the defaulting contractor to complete the project themselves
• Hire a replacement contractor at the surety’s expense
• Pay the owner the cost of completion, up to the bond penalty (usually 100% of the contract value)

Performance bonds are almost universally required for federal government construction projects under the Miller Act (for contracts above $150,000), and are standard practice on state, municipal, and many large private construction projects.

What Is a Payment Bond?

A payment bond is issued alongside the performance bond and guarantees that the general contractor will pay all subcontractors, material suppliers, and laborers on the project. It protects:

• Subcontractors who might not be paid if the general contractor becomes insolvent
• Material suppliers who ship materials based on the general contractor’s credit
• Laborers who may be owed wages if the contractor defaults

Under the federal Miller Act, payment bonds are required alongside performance bonds for federal construction contracts over $150,000. Many states have parallel “Little Miller Acts” applying the same requirement to state public works projects. Payment bonds are less commonly required on private projects, but sophisticated project owners often mandate them.

The Complete Bond Progression on a Construction Project

Understanding how these three bonds work together across a project’s lifecycle clarifies when each is needed:

How Much Do Bid and Performance Bonds Cost?

Bid Bond Cost

Bid bonds are typically issued for free or at a nominal fee when the contractor has a pre-established bonding facility. The bid bond is essentially a letter of credit from the surety affirming the contractor can be bonded if they win. When bid bonds are priced separately, they typically cost $100–$500 for most commercial projects.

Performance and Payment Bond Cost

Performance and payment bonds are priced together as a percentage of the contract value. Rates depend on the contractor’s financial strength, credit, and bonding history:

Example: A $1,000,000 project with a 1% rate generates a $10,000 combined performance and payment bond premium. Rates decrease at larger contract values due to economies of scale in underwriting.

Can You Get a Bid Bond or Performance Bond With Bad Credit?

Yes — but the underwriting process is more involved and rates are higher. Standard construction bond markets typically require:

• Personal credit score of 650+ for bonds up to $350,000
• Business financial statements (balance sheet, income statement) for bonds above $250,000
• A positive net worth and adequate working capital relative to the project size
• Clean bonding and claims history

For contractors with credit challenges, specialty bond programs exist that evaluate the full picture: business revenue, cash on hand, years in business, and project type. These programs can approve bonds for contractors who would not qualify in the standard market — though at higher premiums.

BondsExpress offers specialized bid and performance bond programs for contractors with credit challenges. Their contractor bond programs include options for bad credit applicants seeking bonds from $100,000 up to $10 million in select states.

The Surety’s Underwriting Process for Large Bonds

Unlike the instant-approval model for small license bonds, performance bonds for large projects involve a formal underwriting review. Surety underwriters evaluate what the industry calls the “Three Cs”:

• Character — The contractor’s reputation, honesty, and track record of completing projects
• Capacity — The contractor’s technical ability, equipment, workforce, and project management skills to handle the project
• Capital — The contractor’s financial strength: net worth, liquidity, working capital, and debt levels

Contractors who want to maximize their bonding capacity — the total dollar value of projects they can be bonded for simultaneously — should maintain clean financial statements, keep their work-in-progress schedule manageable, and build a long-term relationship with a consistent surety carrier.

Federal Requirements: The Miller Act

The Miller Act (40 U.S.C. Chapter 31, Subchapter III) requires performance and payment bonds on virtually all federal construction contracts exceeding $150,000. The law was enacted specifically because subcontractors and suppliers have no lien rights on federal property — without a payment bond, they would have no practical recourse if unpaid.

Most states have enacted parallel statutes — often called “Little Miller Acts” — applying equivalent requirements to state-funded construction projects. Thresholds vary by state, ranging from $25,000 to $200,000. Any contractor pursuing public works contracts must understand both federal and state bonding laws in their jurisdiction.

When Private Projects Require Bonds

Private construction projects are not automatically required to carry surety bonds by law. However, sophisticated private project owners — real estate developers, corporate facility owners, institutional investors — commonly require performance and payment bonds on contracts above a certain threshold for the same reasons governments do:

• Protection against contractor default and project abandonment
• Assurance that subcontractors and suppliers are paid, preventing mechanic’s liens on their property
• A signal of contractor financial stability and professionalism

Private project thresholds at which bonds are required vary widely — some owners require them on contracts as small as $100,000; others only for projects exceeding $5 million. Understanding your target clients’ expectations is essential when assessing your bonding needs.

What Is a Maintenance Bond?

A maintenance bond (sometimes called a warranty bond) is an optional bond issued at project completion. It guarantees that the contractor will remedy any defects in workmanship or materials that appear during a defined warranty period — typically one to two years after substantial completion.

Maintenance bonds are most commonly required by public agencies on road, bridge, and municipal infrastructure projects. They are less common on private construction but are occasionally required on LEED-certified or technically complex facilities.

The bond amount is usually 10–20% of the original contract value, and premiums are nominal compared to performance bonds because the risk exposure is limited to defect correction rather than full project completion.

Bid Bond vs. Performance Bond: Side-by-Side Summary

Summary: Choosing the Right Bond for Your Project

Understanding the difference between a bid bond, performance bond, and payment bond comes down to timing and purpose. Bid bonds protect the owner during the bidding stage; performance and payment bonds protect the owner, subcontractors, and suppliers once work begins. For any federal contract over $150,000 — and most public works projects at the state level — all three are required by law.

If you are a contractor building your bonding capacity for the first time, start by establishing a bonding facility before you bid on bonded work. The underwriting process is straightforward for contractors with clean financials, and having a pre-approved facility means faster bond issuance on every future bid.

Get Bonded for Your Next Contract

Apply for bid bonds, performance bonds, and payment bonds at BondsExpress.com — with specialized programs for contractors at all credit levels. A+ BBB rated since 1965.