The Seven Bonds a Contractor Meets
There are dozens of surety bond types. A construction contractor meets seven of them, and really only the first four with any regularity.
Every one works the same way underneath: three parties, you promise, the surety guarantees, and you indemnify the surety. If that sentence is not familiar yet, start with how surety bonds actually work.
Quick reference
| Bond | Guarantees | Typical amount | Typical cost |
|---|---|---|---|
| Bid | You will sign at your bid price and produce final bonds | 5–10% of bid | Usually free |
| Performance | You will complete the contract | 100% of contract | ~0.6–1.5% of contract |
| Payment | Your subs and suppliers get paid | 100% of contract | Usually bundled with performance |
| Maintenance | Defects fixed after completion | 10–100% of contract | ~$1.25–$2.00 per $1,000 |
| License / permit | You will obey the licensing law | Set by statute | $100–$500/year typically |
| ERISA / fidelity | Nobody steals from the retirement plan | 10% of plan assets | A few hundred dollars |
| Subdivision | Public improvements get built | 100% of improvement cost | Similar to performance |
1. Bid bond
What it guarantees: that if the owner accepts your bid, you will enter into the contract at that price and furnish the required performance and payment bonds.
Who requires it: essentially every public agency, and private owners on larger projects.
Amount: most commonly 10% of the bid. Sometimes 5%. Occasionally a fixed dollar amount. Read the bid documents — the percentage is specified there.
What it costs: normally nothing. Brokers treat bid bonds as part of the service.
Where it bites: if you win and then walk away, the owner can claim on the bid bond for the difference between your bid and the next acceptable bid, up to the penal sum. Say you bid $2,000,000, the next bidder is at $2,150,000, and you refuse the contract — the owner's damages are $150,000, and your surety pays it. Then your surety comes to you for the $150,000 under the General Indemnity Agreement.
That is the mechanism. The far bigger consequence is that you have now demonstrated to your surety that your numbers cannot be trusted, and that costs you more than $150,000 over time.
A bid bond obligates you to your bid, including any arithmetic mistake in it. Most jurisdictions allow withdrawal of a bid containing a demonstrable clerical error if you catch it fast and can prove it, but the window is short and the standard is unforgiving. Check your numbers before the bid, not after.
Alternatives you may see: a certified check or cashier's check for the same percentage ("bid security"). Legal, but it ties up real cash for weeks. A bid bond is nearly always better for your cash position.
2. Performance bond
What it guarantees: that you will complete the work in accordance with the contract documents.
Who requires it: public agencies by statute; private owners and their lenders by contract; general contractors from their significant subs.
Amount: the "penal sum" is normally 100% of the contract value. Some owners require more, though above 100% is unusual.
What it costs: the main event. Banded sliding-scale premium — see what construction bonds actually cost.
Where it bites: if the owner declares you in default, the surety chooses among four remedies — finance you, tender a replacement contractor, take over and complete, or pay the penal sum. Whatever it spends, it recovers from you and every GIA signer.
Important. The performance bond protects the owner, not you. It is easy to misread a bond you are paying for as your protection. It is not. Your protection is your contract, your insurance, and your lien or bond claim rights.
The dual obligee rider. When a lender is also at risk on the project, the owner may ask for a rider adding the lender as a second obligee. Sureties usually accept it, sometimes for additional premium. It is worth having your broker read the rider — some forms extend the surety's obligations further than the standard bond does, and the surety will want to know.
3. Payment bond
What it guarantees: that your subcontractors, suppliers and laborers get paid.
Who requires it: almost always issued together with the performance bond, on the same contract, for the same penal sum.
What it costs: normally included in the performance bond premium — one premium, two bonds. If you are quoted separately for each, question it.
Why it exists: you cannot place a mechanics lien on public property. A courthouse cannot be foreclosed on. So the statutes that require payment bonds on public work exist to give unpaid subs and suppliers a substitute remedy: instead of a lien, they make a claim against the bond.
That has two consequences most contractors have not thought through:
As a prime contractor, your payment bond is a standing invitation for any unpaid party down your chain to come straight at your surety. A dispute with a sub that you consider legitimate can turn into a bond claim, and a bond claim on your record affects your underwriting whether or not you were right.
As a subcontractor on public work, the payment bond is your primary collection remedy, and it has hard deadlines. Miss them and you lose the claim entirely. See when a bond claim happens and the existing payment bonds guide.
Ask for a copy of the prime's payment bond at the start of every public job you sub on. You have a statutory right to it in most jurisdictions, it takes one email, and it is worthless to request for the first time on the day you decide to claim.
4. Maintenance / warranty bond
What it guarantees: that defects in workmanship and materials will be corrected for a defined period after completion.
Amount: varies widely. 10%, 25%, or 100% of contract value are all common. Duration is usually one to two years, occasionally longer on infrastructure.
What it costs: rated on its own, much cheaper scale — commonly $1.25 to $2.00 per $1,000 of bonded amount. A 2-year maintenance bond on a $2M job runs a few thousand dollars, not tens of thousands.
The 12-month rule. A maintenance period of 12 months or less is normally included in your performance bond at no extra premium. Beyond 12 months, you pay. This is one of the three surcharges that regularly ambushes contractors at bid time.
Read the warranty clause before you bid, not after you win. A 24-month or 36-month warranty requirement buried in the specifications is a real cost, and it is a cost you can quantify precisely with the premium calculator. Extended warranties also extend the period the surety carries you on its books, which consumes a little of your aggregate capacity.
5. License and permit bonds
What it guarantees: that you will comply with the law or ordinance under which you are licensed. If you violate it and someone is harmed, they can recover against the bond.
Who requires it: state contractor licensing boards, and cities for certain permits (right-of-way, encroachment, street opening, demolition).
Amount: set by statute, not by you. In California, for example, the contractor's license bond has been $25,000 since January 2023, with a separate bond of qualifying individual at $25,000 where applicable. Other states set their own figures and they change — check your board's current requirement.
What it costs: a few hundred dollars a year for a contractor with clean credit, and substantially more if the owners' personal credit is poor, since these are often credit-scored rather than fully underwritten.
What makes them different: these are the one category where the underwriting is often mostly a credit check, they are annual and renewable rather than job-specific, and lapsing one can suspend your license — which voids your ability to bid, and in some states affects your ability to collect on work already performed.
Track the renewal date. A license bond that lapses because a renewal notice went to an old address is a genuinely common and genuinely catastrophic administrative failure. Put it on the surety document calendar.
6. ERISA / fidelity bonds
What it guarantees: that plan participants are made whole if someone handling retirement plan funds steals them.
Who requires it: federal law. ERISA §412 requires that every person who handles plan funds be bonded.
Amount: 10% of plan assets handled, with a $1,000 minimum and a $500,000 cap — rising to a $1,000,000 cap for plans holding employer securities. The amount is recalculated at the beginning of each plan year.
What it costs: a few hundred dollars.
Why it is on this list: it has nothing to do with construction and everything to do with the fact that if you offer a 401(k), you are required to have one, and it is one of the most commonly missed compliance items in small contracting businesses. Your Form 5500 asks whether you have it.
Note. This is a fidelity bond — theft coverage — not fiduciary liability insurance, which covers bad investment decisions. They are different products and having one does not satisfy the requirement for the other.
7. Subdivision / site improvement bonds
What it guarantees: that the public improvements a developer promised — streets, sidewalks, curbs, storm drains, sewer, water, street lighting, landscaping — will actually get built to the city's standard.
Who requires it: the municipality or county, as a condition of recording a map or issuing permits.
What makes them different, and harder:
- The obligee is a government body, and the bond often has no defined expiration — it stays open until the city formally accepts the improvements, which can take years longer than construction
- There is frequently no contract price to rate against, only an engineer's estimate
- The principal is usually the developer, not the contractor, so the surety is underwriting a real estate deal, not a construction company
- Sureties are noticeably more conservative here, and often require collateral
Where it bites: these bonds tie up aggregate capacity for years after the work is finished. If you carry subdivision bonds, chase the city for formal acceptance and bond release actively — nobody else will, and every month of delay is capacity you cannot use on new work.
Two things that are not bonds but get confused with them
Letters of credit. A bank instrument some owners accept in place of a bond. Very different economics: an LOC is drawn directly against your bank line, reduces your borrowing capacity dollar for dollar, and is typically payable on demand with no investigation of whether the demand is justified. A bond costs a premium but leaves your bank line intact and gives you a surety with a strong interest in investigating before it pays. Given the choice, most contractors are better off with the bond.
Subcontractor default insurance (SDI, sometimes called by the brand name Subguard). A real insurance product a large GC buys to cover subcontractor default across its whole program, in place of collecting individual bonds from each sub. It is two-party insurance, the GC controls the claim, there is a deductible and a co-pay, and there is no indemnity running back to the sub. If a GC tells you they carry SDI so you do not need to be bonded, that is a genuine alternative — but understand you have lost the surety's prequalification of you as a marketing asset.
What to do next
If you are pricing a job, run the numbers: the calculator handles performance, maintenance and the surcharges together.
If you have never been bonded, read getting bonded for the first time.
If a claim has landed, read when a bond claim happens and call a construction attorney the same day.
Not legal advice. Bond requirements, statutory amounts and deadlines vary by state and change. Verify current requirements with your licensing board, your surety bond producer and your attorney.
Try it: Bond Premium Calculator.