Payment & Performance Bond

A payment bond is a type of surety bond that guarantees subcontractors, suppliers, and laborers will be paid for their work and materials on a construction project.

Contractors typically obtain payment bonds before starting public (and some private) projects. The bond provides a financial guarantee that everyone who contributes to the job will be paid, even if the contractor fails to pay.

If payment isn’t made, those parties can file a claim with the surety company that issued the bond. The surety pays the claim, and the contractor must reimburse the surety.

Payment bonds are often issued together with performance bonds, which guarantee that the contractor completes the work according to contract terms.

A performance bond is a type of surety bond that guarantees the contractor will complete a construction project according to the terms of the contract. It protects the project owner from financial loss if the contractor fails to meet deadlines, quality standards, or contract requirements.

If the contractor defaults, the surety company steps in to cover the cost of finishing the work—up to the full bond amount.

Together, these bonds ensure that:

• The work will be done
• And everyone will be paid

That’s why both bonds are typically required on public construction projects and often bundled together by surety providers.

Payment and performance bonds are typically required before work begins on:

• Public construction projects (federal, state, and local)
• Privately funded projects with strict contract terms or lender requirements
• Projects involving taxpayer money or public trust

These bonds protect against non-payment and project default, making them a standard prequalification requirement on government jobs and large-scale private developments.

In the U.S., performance and payment bond use is governed by:

• The Miller Act (Federal):

Requires both bonds on federal construction contracts over $100,000

• Little Miller Acts (State):

Most states have their own version of the Miller Act for state-funded projects

• Industry Standards:
• Bonds must be issued by a Treasury-listed surety
• Bond forms often follow AIA templates
• Both bonds are typically packaged together and required before work starts

These laws and bonding practices exist to protect project owners and subcontractors from financial risk due to contractor non-performance or non-payment.

In construction, payment and performance bonds are essential tools for managing risk and maintaining trust throughout the project lifecycle to:

• Protect owners from contractor default
• Ensure subcontractors and suppliers are paid
• Encourage fair bidding and responsible project delivery
• Reduce financing risk for lenders and developers

Because of these benefits, they’re commonly required on public infrastructure jobs, large commercial builds, and many bonded private-sector projects.

A payment bond ensures that subcontractors, suppliers, vendors, and laborers on a specific project are paid as agreed per your project contract. A performance bond, on the other hand, is a guarantee that the work promised in a contract is delivered adequately.

Both payment and performance bonds are required for many state and federal construction projects, and they are underwritten by a surety agency together in nearly all cases.

Can you Get a Payment Bond Only?

You can get a payment bond without an attached performance bond, but it’s rare. Most construction projects on a state or federal level require both to be in place in order for a contractor to work on a project legally. In the rare cases where a performance bond is not also a requirement, a payment bond may be obtained on its own.

Payment and performance bonds do not cost the full bond amount. Instead, you pay a percentage of the total bond value—this is called your bond rate.

Typical bond rates range from 1% to 4%, depending on:

• Your personal credit score
• Your company’s financial statements
• The project size and location
• Your industry experience and track record

Example:

If your project requires a $500,000 bond and your rate is 2%, your bond cost would be $10,000.

Yes. You can still qualify for a payment bond with bad credit, but:

• You may need to provide more financial documentation
• Your bond rate will likely be higher (closer to 4%)
• A reliable surety provider can help guide you through the process

Over time, improving your credit and maintaining a clean claims history can help you qualify for lower rates on future projects.

A payment bond is a three-party agreement between:

• The principal (contractor buying the bond)
• The obligee (project owner requiring the bond)
• The surety (bonding company backing the contractor)

If the contractor fails to pay subcontractors, suppliers, or laborers, those parties can file a claim against the payment bond.

Here’s what happens next:

1. The surety company investigates the claim
2. If valid, the surety pays the claimant up to the bond amount
3. The contractor (principal) must then repay the surety in full

In short: the bond protects unpaid parties—but the contractor is financially responsible for repaying the surety.

Getting a payment bond is a straightforward process if you’re prepared with the right documents and financials. Here’s how it works:

Step 1: Gather Your Documents

To apply, you’ll need:

• Business financials (balance sheet, income statement, cash flow)
• Personal and business tax returns
• Project details and work schedule
• Your payment bond form (usually from the obligee or your bond agency)

Tip: Work with a construction-savvy CPA to ensure your financials are formatted correctly—this can increase your chances of getting approved and lower your bond rate.

Step 2: Apply Through a Surety Provider

Submit your application through a licensed surety bond agency. Most offer online applications with fast review times.

Step 3: Review and Sign the Bond Agreement

Once approved, you’ll receive a bond agreement to sign. This outlines your obligations under the bond and must be signed before the bond is issued.

Step 4: Pay the Bond Premium

You’ll pay a percentage of the bond amount (usually 1% to 4%). Once payment is received, your bond will be issued.

Step 5: Submit the Bond

Submit your finalized bond to the project owner (obligee) before work begins. This is often a legal requirement for public projects.

We created a comprehensive guide which explains everything you must know in order to bid on and win projects. The topics covered in the e-book include:

• The pros and cons of bidding on public construction projects
• Bid solicitation procedures
• What influences the bid process
• How to bid on public projects
• Surety bonds for bidding and construction
• Why you need to understand bond claims

There are several types of insurance coverages that are recommended for contractors, but the recommended coverage will vary based on your operation.

If you’d like to learn more about all of the insurance coverages available to you, please read our contractor insurance guide.

What is the difference between a payment bond and a performance bond?

A payment bond guarantees that subcontractors, suppliers, and laborers will be paid for their work. A performance bond ensures the contractor completes the project according to the contract terms.

Payment bonds protect the people doing the work. Performance bonds protect the project owner.

What is the purpose of a performance bond?

A performance bond protects the project owner from financial loss if the contractor fails to complete the job, delivers poor-quality work, or misses deadlines. The bond ensures the project is finished as agreed.

What is a 100% performance and payment bond?

A 100% bond means the coverage amount equals 100% of the total contract value. This is standard on public construction projects—ensuring full protection for both completion and payment.

How do payment and performance bonds work?

The contractor buys both bonds from a surety provider.

If the contractor fails to complete the work (performance) or pay workers and suppliers (payment), the surety covers the claim and seeks repayment from the contractor.

How much does a performance and payment bond cost?

Together, these bonds typically cost 1% to 4% of the total contract amount. Costs depend on your credit, financials, project size, and bonding history.

Who pays for payment and performance bonds?

The contractor pays for the bond. It’s often included in the contractor’s bid or project costs and passed along to the project owner as part of the total contract price.

What’s an example of a payment and performance bond in action?

A contractor is hired to build a new city park.

• The performance bond guarantees the city that the park will be built on time and to spec.

• The payment bond ensures all subcontractors and suppliers (e.g., landscapers, concrete suppliers) are paid—even if the contractor runs out of cash.

Can I get bonded with a new business or bad credit?

Yes. New contractors and those with poor credit can still qualify—though rates may be higher. Having clean financials, experience, and a strong CPA-prepared statement improves your chances.