Bid bond vs performance bond vs payment bond

Three bonds, three moments in a job

All three have the same three parties. The principal is the contractor. The obligee is the party the bond names, usually the owner. The surety stands behind the principal's promise. The bond amount is called the penal sum, and it caps what the surety owes under that bond.

A bond is not insurance for the contractor

Insurance spreads losses, and the insured does not repay the insurer. A surety expects no losses. Before it writes a bond, it has the contractor, and usually the owners of the contracting company personally, sign an indemnity agreement. If the surety pays a claim, it turns to the contractor to be repaid. That is why sureties look closely at a contractor's financial ratios, work in progress and experience before they bond a job.

Where each bond comes from

• Bid bond. The invitation to bid says whether bid security is required and how much, often stated as a percentage of the bid. Some owners accept a certified or cashier's check instead. The what is a bid bond guide walks through a claim.
• Performance and payment bonds. The contract or the law sets them. On federal construction, the Miller Act requires both above a dollar threshold that changes over time. Most states have similar laws for their own public work, often called Little Miller Acts, each with its own threshold and claim rules. Private owners require them by contract when they choose to.

Why public jobs lean on the payment bond

On private work, an unpaid subcontractor or supplier can usually file a mechanics' lien against the property. Public property generally cannot be liened, so the payment bond takes the place of lien rights. Notice and suit deadlines for a payment bond claim are set by the statute or the bond, and they differ by jurisdiction. Never answer one from memory. The lien waivers guide covers the private side.

A worked example with invented numbers

A contractor bids a public building at $1,850,000. The bid documents call for a bid bond of 5% of the bid and, if awarded, performance and payment bonds each at 100% of the contract.

• Bid bond penal sum: 1,850,000 x 0.05 = $92,500. Check: 10% would be 185,000, and half of that is 92,500.
• Performance bond penal sum: 1,850,000 x 1.00 = $1,850,000.
• Payment bond penal sum: $1,850,000.

The surety charges one premium for the performance and payment bonds together. Using an invented rate of 1.1% of the contract: 1,850,000 x 0.011 = $20,350. Check: 1% is 18,500 and 0.1% is 1,850, and 18,500 + 1,850 = 20,350. Real rates vary by surety, contractor and job.

Now suppose the job is built and a drywall supplier is owed $38,000 that the contractor never paid. The supplier claims against the payment bond, not the performance bond, because the work was finished. If the surety pays the $38,000, it then collects that amount from the contractor under the indemnity agreement.

Common mix-ups

• Calling the owner the principal. The contractor is the principal. The owner is the obligee.
• Sending an unpaid sub to the performance bond. Unpaid labor and material claims go to the payment bond.
• Treating the penal sum as the premium. The penal sum caps the surety's liability; the premium is its fee.

On the NASCLA exam

Bonds sit in Procurement and Contracting Requirements, the largest subject area at 31 of the 115 scored questions. Tab the bonds topic in the NASCLA Contractors Guide to Business, Law and Project Management. When a question asks who is protected, name the obligee first.

Practice it

Work the what is a bid bond claim example, then compare lien waivers on private jobs. The general liability vs builders risk vs workers comp guide covers the insurance side. On federal construction the Miller Act requires the performance and payment bonds; see the Miller Act and Little Miller Acts.

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Sources

Show the list

• 40 U.S.C. 3131, Bonds of contractors of public buildings or works (the Miller Act), Legal Information Institute.
• PSI Candidate Information Bulletin 1458, content outline and reference list, updated 7 Jul 2026. Retrieved 5 Nov 2026.