What Is a Performance and Payment Bond?
If you’re a contractor bidding on public or private construction projects, you’ve probably heard the terms performance bond and payment bond. While these two types of surety bonds are often required together, they serve different purposes and may be issued separately depending on the project.
Before you bid on a project, review our guide to performance and payment bonds and why you might need them.
What Is a Performance Bond?
Performance bonds are surety bonds that guarantee you will complete a project according to your contract, protecting the project owner if you default or fail to perform.
A performance bond is a three-party guarantee between you (the contractor), the project owner (the obligee), and a surety company. The surety promises the owner that your work will be completed according to the contract terms, even if you run into financial trouble or walk off the job.
When Are Performance Bonds Needed?
Performance bonds are most common on public construction projects, but they are also used on large private jobs and some service contracts where failure to perform would create major risk.
What Happens If You Fail to Meet Your Performance Bond’s Requirements?
Contractors usually run into performance bond problems when they underbid a job, run out of cash, fall behind schedule, or fail to meet quality and safety standards. If the owner declares you in default and files a valid claim on your bond, the surety investigates and decides how to resolve the problem.
The surety may:
- Step in to help you finish the project under closer oversight
- Hire another contractor to complete the work
- Pay the project owner for covered damages so they can bring in someone else
No matter what course of action the surety chooses, you are responsible for reimbursing the surety for any losses, legal fees, or completion costs they pay on your behalf.
What Is a Payment Bond?
Payment bonds are surety bonds that guarantee you will pay covered subcontractors, suppliers, and laborers on a project.
Like performance bonds, a payment bond is a three-party agreement between you (the contractor), the project owner (the obligee), and a surety company. The bond guarantees that eligible subcontractors, laborers, and material suppliers on a bonded job are paid for the work and materials they provide, even if you run into cash-flow problems or default on your payment obligations.
On many public works projects, payment bonds are required by laws like the federal Miller Act and state “Little Miller Acts,” and they are also common on larger private projects where owners want extra protection.
When Are Payment Bonds Needed?
Payment bonds are required on most public works projects and are common on larger private jobs where mechanics' liens may be limited or where the owner wants extra protection. Payment bonds are usually issued alongside performance bonds, using the same surety and application, to make sure the entire project team is protected.
What Happens If You Fail to Meet a Payment Bond's Requirements?
Contractors tend to run into payment bond problems when cash flow is tight, when project funds are used on other jobs, or when there is poor tracking of change orders and pay applications. If you fall behind on paying subs or suppliers and they file a valid claim, the surety will investigate and decide how to make them whole.
The surety may:
- Pay subcontractors, suppliers, or laborers directly for the amounts owed
- Fund a structured payment plan that brings accounts current
- Pay the project owner so they can resolve outstanding payment issues
You are still responsible for reimbursing the surety for any claim payments and related costs. Multiple payment bond claims can damage your reputation, lead to termination from the project, and make it harder or more expensive to qualify for future bonds.
How Are Performance and Payment Bonds Different?
Performance bonds protect the project owner by guaranteeing that the work will be completed according to the contract, while payment bonds protect subcontractors and suppliers by guaranteeing they’re paid for their labor and materials.
Can Performance and Payment Bonds Be Separate?
Yes. While they’re often issued together—especially on public works projects—they can be issued separately depending on the contract requirements. Below are the most common reasons you might need one bond but not the other
- Performance bond only: May be required when the owner is primarily concerned with project completion.
- Payment bond only: May be required when the owner wants to protect against unpaid subcontractors but isn’t concerned about performance (e.g., in supply contracts).
Some private projects may only require one or the other, while government contracts typically require both.
How Do You Apply for Performance and Payment Bonds?
Surety companies underwrite performance and payment bonds in a similar way. They look at your experience, backlog, financial strength, credit history, and how the project fits your capacity before approving your bond.
For each specific bond, the surety also reviews details like the contract terms, project type, and who needs to be protected. You will usually complete one application, provide supporting documents, and sign a general indemnity agreement that applies to both performance and payment bonds.
Common Performance Bond Application Requirements
- Detailed contract scope and value, including schedules and change order provisions
- Contractor’s experience and resume for similar projects
- Business and personal financial statements, tax returns, and credit history
- Work-in-progress reports and backlog schedule
- Bank reference letters or proof of available working capital
Common Payment Bond Application Requirements
- List of subcontractors, suppliers, and major purchase orders
- Payment terms and schedules for subs and vendors
- Procedures for lien waivers, joint checks, and progress payments
- Contractor’s payment history, including aging of payables
- Creditworthiness and liquidity to cover payroll and materials
In most cases, both bonds are issued under the same application and indemnity agreement—but the surety evaluates the risks separately.
Why You Might Need a Performance Bond and/or a Payment Bond
- Public projects: Federal jobs covered by the Miller Act and many state and municipal projects require both performance and payment bonds once contracts exceed a set dollar threshold, often around $100,000. These laws are designed to protect taxpayers, owners, and downstream subs and suppliers, so the bonding requirements are usually non-negotiable if you want to bid on the work.
- Private projects: On private jobs, owners have more flexibility. Some will require both bonds, while others may only want a performance bond if they already trust your payment practices, or only a payment bond if they are closely managing quality and schedule themselves. The mix of bonds often depends on the size of the project, the parties’ track records, and the owner’s risk tolerance.
- Supply contracts: On material-only or equipment supply contracts, the owner may want to ensure that vendors get paid and materials are delivered as promised. In these cases, an owner might require a payment bond, a supply bond, or both. A supply bond is essentially a performance bond for a material-only contract, guaranteeing that specified goods are delivered as promised.
Always read the bid documents and contract specifications carefully so you know exactly which bond or combination of bonds you must provide.
What Do These Bonds Mean for Contactors?
As the contractor, performance and payment bonds:
- Help you qualify for larger, more competitive projects
- Build trust with project owners and vendors
- Require financial responsibility and transparency
- Come with personal liability if a claim is made
Need Help Securing Performance and Payment Bonds?
Whether you’re bidding on a public works job or negotiating a private contract, our team at ProSure Group can help you understand the requirements, prepare your application, and get bonded quickly.
Learn more about our performance bond and payment bond services today.
📞 Call us at (800) 480-3883
🌐 Visit us at www.prosuregroup.com
📩 Or request a consultation today by emailing Contractbonds@prosuregroup.com