Bid bond vs performance bond vs payment bond: when contractors need each (2026)

The three core construction bonds explained — who's protected, when each is required, what each costs, and what happens on a claim.

Updated June 2026 · BettrBonds — Contract surety for SE contractors

Side-by-side: what each bond does

Bid bonds: protecting the project owner during procurement

When a contractor submits a bid on a construction project, the project owner needs assurance that if the contractor wins, they'll actually accept the contract at the bid price. Contractors sometimes "bid low and walk" — they win the bid, then refuse to sign because they realize the project is unprofitable. The bid bond covers the owner's cost of going to the next lowest acceptable bidder.

Bid bond mechanics:

• Required on most public construction projects (federal, state, municipal, school)
• Required on many large private commercial projects (over $1M)
• Amount is a percentage of the bid: federal commonly 5%, state DOT often 5-10%, large private 5-10%
• Typically NO premium charged — sureties issue bid bonds as a courtesy because they want to write the performance bond if the contractor wins
• Small underwriting fee may apply ($100-$250) per bid bond
• If the contractor wins the bid AND signs the contract AND posts the performance bond, the bid bond is released

Performance bonds: protecting the owner during construction

Performance bonds guarantee that if the contractor abandons the project, goes bankrupt, or fails to perform, the surety will:

1. Complete the project with a takeover contractor approved by the owner, OR
2. Pay another contractor to complete the project, OR
3. Pay the owner the cost of completion up to the bond amount

Performance bond mechanics:

• Required on virtually all public construction over $150K (federal Miller Act, state Little Miller Acts)
• Required on most large private commercial, school, hospital, federal facility projects
• Amount is typically 100% of contract value; complex projects sometimes 110%
• Premium runs 0.75%-3% of contract value (see our detailed cost breakdown)
• Premium is paid up front and is non-refundable except on contract reduction
• Surety's exposure runs until project completion + warranty period (typically 1 year)

Payment bonds: protecting subs, suppliers, and laborers

Payment bonds guarantee that subcontractors, material suppliers, and laborers on the project get paid even if the prime contractor fails to pay them. Without a payment bond, unpaid subs typically file mechanic's liens against the property — but federal property cannot be liened, which is why federal projects require payment bonds. State and private projects often require payment bonds to prevent mechanic's liens.

Payment bond mechanics:

• Required on Miller Act projects (federal over $150K) and most Little Miller Act projects (state)
• Required on many private projects where owner wants to prevent mechanic's liens
• Amount is typically 100% of contract value
• Usually bundled with the performance bond as a combined "P&P bond" — same form, same surety, ONE premium covers both
• Standalone payment bonds (when required without performance bond) cost about 1-2.5% of contract value
• Claims can be filed by first-tier subs/suppliers (direct contract with prime) and sometimes second-tier (sub's sub) depending on bond terms and state law

What happens when a claim is filed

The surety bond claim process is fundamentally different from an insurance claim:

1. Claim is filed with the surety by the protected party (owner for performance bond, sub/supplier for payment bond)
2. Surety investigates — reviews the contract, the claim, the contractor's response, project records, any partial completion
3. Surety decides — pay the claim (up to bond amount), arrange completion, or deny
4. If surety pays, the contractor is required to reimburse the surety in FULL under the indemnity agreement signed when the bond was issued
5. Surety can pursue collection against the contractor (corporate assets) AND against the individual indemnitors (personal assets) — typically including the owner's home, savings, retirement

This is why a surety claim is far more severe than an insurance claim. Insurance pays without reimbursement. Surety pays then collects from the contractor. A single claim against your bonding history also damages your ability to get bonded going forward — many sureties decline contractors with any prior loss.