Performance Bonds for Construction projects
Performance Bonds for construction projects
These are used for almost all Government projects but also for many larger contractors.
PDF on Miller Act from GSA.gov
JW suretybonds contractor-bonds performance-bond
A performance bond is a type of surety bond that guarantees a contractor will fulfill all obligations under a construction contract, ensuring the project is completed according to the agreed-upon terms.
It is a financial guarantee provided by a surety company, typically an insurance or banking institution, to the project owner (the obligee), protecting them against financial loss if the contractor (the principal) fails to perform. The bond is often required for public construction projects, including federal, state, and local government jobs, and is a common requirement for large-scale private projects as well.
Under the federal Miller Act, performance bonds are legally required for all construction contracts exceeding $150,000 awarded by the U.S. government.
Similarly, most states have enacted "Little Miller Act" statutes that mandate performance and payment bonds for state-funded projects valued at $100,000 or more. These bonds are typically issued alongside payment bonds, which ensure subcontractors and material suppliers are paid, forming a dual obligation to protect both the project owner and the supply chain.
The bond amount usually equals 100% of the contract price, though some local governments may allow flexibility in determining the bond amount.
If a contractor defaults—due to insolvency, bankruptcy, or failure to meet project specifications—the surety company is responsible for either securing a new contractor to complete the work or compensating the project owner for the financial loss incurred. The surety may also take steps to complete the project themselves or cover the cost difference if a new contractor is needed at a higher price.
Securing a performance bond involves a risk assessment by the surety, which evaluates the contractor’s financial stability, creditworthiness, and past performance.
The cost of the bond, known as a premium, typically ranges from 1% to 15% of the bond amount, depending on the contractor’s risk profile and the bond type. Contractors are generally responsible for paying the premium, which is often factored into their bid price.
Performance bonds serve as a critical risk management tool, providing peace of mind to project owners, developers, and investors by reducing the financial exposure associated with project non-completion.
They also enhance a contractor’s credibility and competitiveness in bidding for projects, demonstrating financial reliability and capability. While performance bonds are most common in construction and real estate, they are also used in other industries, such as commodity contracts, to ensure contractual performance.