Performance and Payment Bonds: Costs, Uses, and How to Calculate Them

Key Takeaways

  • Performance and payment bonds typically cost 1% to 3% of the contract value for well-qualified contractors, though flat rates for credit-challenged applicants can push that closer to 2% or higher, plus an additional fee if SBA backing is involved.
  • The Miller Act's operative threshold for federal construction contracts is $150,000, not the $100,000 figure still cited by many published sources.
  • State Little Miller Act thresholds vary by both state and bond type, so a contractor working across state lines cannot assume one rule applies everywhere.
  • The bond premium is always calculated on the full contract amount, even when the required coverage percentage covers only part of that value.
  • CPA-prepared financial statements, especially audited or reviewed ones, qualify contractors for better rate tiers and higher bonding capacity than internally prepared statements.

When a contractor wins a bid on a public project, one of the first questions is usually about the bond, with most asking what it will cost and when it needs to be in place. Project owners on the other side of that contract want to know what the bond actually protects and how the cost gets absorbed. 

Payment and performance bonds are central to how construction projects get financed, guaranteed, and completed, but the pricing structure confuses both sides of the table. Whether you’re a contractor or a project owner, review our guide to learn more about how performance and payment bonds are calculated and used. 

What Is a Performance Bond?

A performance bond guarantees that a contractor will complete a project according to the terms, schedule, and price in the contract.

If the contractor defaults, the surety steps in by financing a replacement contractor, completing the work directly, or compensating the project owner up to the bond amount. For project owners, this bond protects the investment and keeps the project moving even when something goes wrong.

What Is a Payment Bond?

A payment bond guarantees that everyone working on the project — subcontractors, laborers, and material suppliers — gets paid according to the contract terms. 

On federal projects, the payment bond fills a critical gap because subcontractors and suppliers cannot file mechanics' liens against government-owned property, leaving the payment bond as their primary recourse if a general contractor fails to pay. 

Why Are Payment and Performance Bonds Often Issued Together?

Performance and payment bonds protect different parties on the same contract, so sureties package them together.

Construction projects involve multiple layers of risk: the owner needs assurance that the work gets finished, while the subcontractors, laborers, and suppliers further down the chain need assurance that they get paid regardless of what happens between the owner and the general contractor. 

Since performance bonds protect the project owner and payment bonds protect subcontractors and suppliers, they’re issued together to reduce risk for multiple parties.

When issued together, they share a single underwriting file, and the contractor pays a single combined premium rather than two separate charges.

When Are Payment and Performance Bonds Required?

The requirement depends on who owns the project:

  • On federal construction projects, the Miller Act requires both a performance bond and a payment bond. The operative threshold under the Federal Acquisition Regulation (FAR Part 28) is $150,000. Many published sources still cite $100,000, which reflects the original statutory figure before the FAR updated the threshold. For federal contracts, both bonds must equal 100% of the contract value.
  • State and local public projects are governed by each state's version of the Miller Act, commonly called a Little Miller Act, and thresholds vary by state and by bond type. Texas requires a payment bond on public contracts above $25,000 but doesn't require a performance bond until the contract exceeds $100,000. Illinois sets its threshold at $50,000 for both bonds. Contractors working across multiple states need to know the specific requirements in each jurisdiction rather than assuming one rule applies everywhere.
  • Private projects carry no statutory bonding requirement, but performance and payment bonds are increasingly common on them. Project owners use them to protect their investment and reduce lien exposure. Coverage percentages for private work are negotiated between the parties and set forth in the contract documents.

What Determines the Cost of a Payment and Performance Bond?

Payment and performance bond premiums typically run 1–3% of the contract value for qualified contractors. Credit score, financial strength, type of work, and contract size all affect where in that range a contractor lands.

Four factors drive the underwriting decision:

  • Contract size: The premium is always calculated on the full contract amount, even when the required bond covers only a portion of it. Larger contracts also benefit from tiered rate structures, where the percentage charged drops as the contract value increases. A contractor on a $5 million project often pays a lower effective percentage than one on a $200,000 job.
  • Personal credit score: For smaller contractors without extensive CPA-prepared financials, personal credit is the primary underwriting factor. Lower credit scores typically result in flat-rate pricing rather than the tiered rates available to well-qualified applicants.
  • Financial statements: Sureties treat CPA-prepared financials differently depending on their scope. An audited or reviewed statement signals the highest level of financial transparency and qualifies a contractor for better rate tiers. A compilation or internally prepared set of financials typically results in standard or flat-rate pricing and sometimes limits bonding capacity entirely.
  • Type of work: Surety companies file their rates with each state by construction work class. For example, general building and utility work (Class B), specialty trades like roofing and bridge work (Class A), and asphalt paving (Class A-1) carry different base rates. The class of work being bonded is one of the first things an underwriter looks at.

How to Calculate Your Performance and Payment Bond Premium

The formula for a performance or payment bond premium is simple: contract amount multiplied by the premium rate equals the bond cost. The rate itself is where contractors often get surprised, since it shifts based on contract size and qualification.

Here is how that plays out on a $500,000 project for a well-qualified contractor under a standard Class B rate structure:

  • First $100,000 of contract value at $25 per $1,000 = $2,500
  • Next $400,000 of contract value at $15 per $1,000 = $6,000
  • Total premium: $8,500

Strong CPA-prepared financials and a solid track record can earn a 20% credit off that filed rate, bringing the same project closer to a $6,800 premium.

A contractor on the same project without CPA-prepared financials or with credit challenges is more likely to see a flat 2% rate, or a $10,000 premium. Add the SBA Surety Bond Guarantee Program's 0.6% guarantee fee for harder-to-place risk, and the total climbs to roughly $13,000.

Keep in mind that these figures are illustrative. Actual premiums depend on individual underwriting and the specific rate filing that applies in your state.

What Project Owners Should Know About Performance and Payment Bonds

Project owners require bonds but often have the least visibility into who actually pays for them and when. In practice, contractors build the premium into their bid, so the owner absorbs it indirectly, much like materials or labor.

Bond amount matters, too. Federal contracts require both bonds at 100% of contract value, while private project coverage is negotiable and sometimes set at 50%. Either way, the premium is calculated on the full contract amount regardless of the coverage percentage required.

Surety bonds also work differently from insurance. When a claim is paid, the surety pursues reimbursement from the contractor under the indemnification agreement signed before the bond was issued. The owner is made whole, and the contractor remains accountable for the loss.

What to Expect From the Application Process

For contractors preparing to apply, sureties evaluate several factors before issuing a bond:

  • Personal credit: The primary underwriting factor for smaller contractors. Sureties treat credit history as a proxy for how you manage financial obligations, and a lower score will affect both your rate and your approval odds.
  • CPA-prepared financial statements: For larger bonds, these are essential. A CPA-prepared audited statement earns the most favorable treatment; a reviewed statement is a solid second. A compilation may limit both the rate tier and the bonding capacity available. If your CPA does not specialize in construction accounting, that matters, because construction-specific financials are evaluated differently from general business statements.
  • Work history and bonded work on hand: Sureties review your track record on similar projects and how many contracts you are currently bonded on. A heavy existing workload affects how much new capacity is available, even for contractors with strong financials.

Bonding capacity includes both a single-job limit and an aggregate limit. The single limit is the largest bond available for one contract, while the aggregate limit caps the total bonded work a contractor can carry at any one time. Both matter when planning for multiple jobs simultaneously.

Work With a Surety Specialist at ProSure Group

Performance and payment bond pricing varies by contractor profile, project type, and state, and the rates filed across carriers are not uniform. ProSure Group works with more than 30 A.M. Best-rated surety carriers across all 50 states, with a focus exclusively on surety and fidelity bonding. This specialization means faster placement, broader market access, and the ability to match contractors to the carrier most likely to approve their program at a competitive rate.

Learn more about our payment and performance bonds today. If you are ready to get bonded or want to understand what your program looks like before your next bid, start with our bond application or call us at (800) 480-3883.