What it is
A performance bond is a three-party agreement. The contractor (the principal) buys the bond, the project owner (the obligee) is protected by it, and a surety company stands behind the contractor's promise to perform the contract.
If a contractor cannot or does not fulfill the contract terms, the owner may make a claim under the bond. The surety then reviews the claim and, depending on the bond terms and facts, may help arrange options such as financial support or completion of the work. A bond is not the same as insurance, because the contractor remains responsible to the surety for any losses.
Performance bonds are often paired with payment bonds on construction projects, and they may also come up for subcontractors when a general contractor requires bonding down the chain. Whether one is needed, and in what form, depends on the project, the contract and the contracting agency.
How it’s traditionally been approached
Traditionally, performance bonds have been associated with public construction projects, where owners often require them as part of the bidding and contracting process. Private owners and general contractors may also request them, depending on the size and risk of the project.
Contractors have typically worked with a surety company, often through an agent or broker, which reviews factors such as the contractor's financial strength, experience, work history and current workload. The review process and documents requested vary from one surety and one project to the next.
Some contractors begin with a bid bond, then move to a performance bond once a contract is awarded. Others build a relationship with a surety over time. Different approaches suit different businesses, and none is right for everyone.
How the right surety agent may help
The right independent surety agent may help you understand which bond a project actually calls for, read the bond form and contract requirements, and prepare the information a surety is likely to review. An agent who works with several surety markets may also be able to discuss options that fit your type of work.
A first conversation is usually a straightforward discussion about your business, the project, and your timeline. You may be asked about financial statements, experience, and the contract documents. Nothing here guarantees approval or a particular bond capacity, but good preparation can make the process clearer.
Helpful questions to ask include: Which bonds does this project require? What information will the surety want to see? How long does the process typically take? What happens if a claim is made? Who do I confirm requirements with at the project owner or contracting agency?
The bigger picture
Taking on a bonded project can feel stressful, especially for a growing contractor weighing paperwork, cash flow and deadlines. Understanding the bond ahead of time may ease some uncertainty and help you make calmer, better-informed decisions about the work you pursue.
Peace of mind often comes from knowing your obligations and having a knowledgeable professional to ask. If the pressure of running a business is weighing on you, it is reasonable to pace your decisions, lean on trusted advisors, and look after your own wellbeing along the way. Providers.plus is one resource for finding support.
Keep in mind
- This page is educational only and is not legal, financial or insurance advice.
- Bonding requirements, amounts and procedures vary by state, agency and project, so confirm them with a licensed surety agent or broker and the relevant project owner, licensing board or contracting agency.
- Bond approval, bond capacity and contract awards are never guaranteed.
- Constructionperformancebond.com is an independent directory and not a professional advisor.
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Frequently asked questions
What is a performance bond?
A performance bond is a construction bond in which a surety company backs a contractor's promise to complete a contract as written. It protects the project owner if the contractor fails to perform. The details depend on the bond form and the contract.
Who is involved in a performance bond?
Three parties are involved: the principal (the contractor), the obligee (the project owner), and the surety (the company that issues the bond). A licensed surety agent or broker often helps the contractor with the application process.
Is a performance bond the same as insurance?
No, a performance bond is generally not the same as insurance. Insurance typically protects the policyholder, while a bond protects the obligee and the contractor remains responsible to the surety for losses. A licensed agent can explain the differences for your situation.
When is a performance bond required?
It depends on the project, the owner and the contracting agency. Public projects often require them, and private owners may as well. Confirm the requirement with the project owner or contracting agency and a licensed surety agent.
What is the difference between a performance bond and a payment bond?
A performance bond focuses on the contractor completing the work under the contract, while a payment bond focuses on the contractor paying subcontractors, laborers and suppliers. They are often requested together on construction projects. Your contract will usually state which ones are needed.
How can a surety agent help with a performance bond?
A surety agent may help you understand the requirements, gather the information a surety typically reviews, and discuss available options. They cannot guarantee approval or a specific bond capacity. Asking questions early can make the process clearer.
Educational resource. Construction Performance Bond shares general information and connects people with independent surety agents. It is not professional advice. Talk with a qualified professional about your own situation.