Performance and payment bonds are two separate guarantees that protect different parties in a construction or service contract
A performance bond is a may provide from a bonding company that a contractor will complete the work as promised. If the contractor fails to finish the job, abandons it, or does the work so poorly that it violates the contract, the bonding company steps in and either funds completion or pays the project owner for losses. The project owner (usually a government agency or large business) is the protected party.
A payment bond is a may provide that the contractor will pay all the workers, equipment suppliers, and material vendors who helped complete the project. If the contractor doesn't pay them, those workers and suppliers can file a claim against the payment bond instead of suing the contractor or placing a lien on the property. The protected parties are the people and companies who actually did the work or supplied materials.
These bonds are not insurance. The bonding company is not absorbing risk for free—the contractor pays a premium (usually 1 to 3 percent of the contract value) upfront, and if a claim is paid, the contractor must repay the bonding company. The bonds exist to make sure money flows to the right people when a contract goes wrong.
Key Takeaways
- A performance bond protects the project owner if the contractor fails to complete the work or does it incorrectly.
- A payment bond protects workers and suppliers if the contractor doesn't pay them for their labor or materials.
- The contractor pays the bonding company a premium to issue the bonds, and must repay any claims the bonding company pays out.
- Federal construction projects over $150,000 require both bonds by law; state and local projects have different thresholds.
- A claim against a bond must usually be filed within a set window—often 90 days to one year after the work is complete.
When performance and payment bonds are required
Federal construction contracts over $150,000 must include both bonds under the Miller Act. State and local governments set their own thresholds—some require bonds on projects over $50,000, others over $100,000, and some have no requirement at all. Private projects (a homeowner hiring a contractor, a business building an office) are not required to use bonds, though some large private owners request them anyway.
Bonds are most common in construction, but they also appear in service contracts—janitorial work, security, maintenance—where the work is substantial and the client wants protection against non-performance or non-payment of subcontractors.
How a performance bond claim works
If a contractor stops work, walks off the job, or delivers work that clearly violates the contract terms, the project owner can file a claim with the bonding company. The claim must include documentation: the original contract, proof that the contractor was notified of the breach and given a chance to fix it, and evidence of the loss (repair quotes, completion costs, photos of defective work).
The bonding company investigates the claim. If it is valid, the company can either hire a new contractor to finish the work, pay the project owner for the cost of completion, or negotiate a settlement. The process typically takes weeks to months, depending on the size of the claim and how much investigation is needed.
The contractor is then liable to the bonding company for the full amount paid out, plus interest and legal fees. This is why contractors must have the financial capacity to repay a claim—the bond is not a free pass.
How a payment bond claim works
A worker or supplier who was not paid can file a claim against the payment bond. The claimant must prove they did the work or supplied the materials, that they were not paid in full, and that they followed the notice requirements (which vary by state and contract type). On federal projects, a supplier typically must notify the contractor in writing within 90 days of the last delivery; a worker must file within one year of the last day worked.
The bonding company pays valid claims directly to the worker or supplier, bypassing the contractor entirely. This protects workers from losing wages because a contractor ran out of money or went bankrupt mid-project. The contractor then owes the bonding company for the payout.
The difference between bonds and other protections
A performance bond is not the same as a contractor's license or insurance. A license shows the contractor is registered with the state; insurance covers accidents and injuries on the job. A bond guarantees the work will be done and paid for. Some contractors have all three, some have only one or two.
A payment bond is not the same as a lien. A lien is a legal claim on the property itself—a worker can place a lien on a house if the contractor doesn't pay them. A payment bond is a claim against the bonding company, which is faster and does not tie up the property. On federal projects, liens are not allowed, so the payment bond is the only remedy.
What happens if a bond claim is denied
A bonding company can deny a claim if the claimant did not follow the notice requirements, if the claim is filed too late, or if the bonding company determines the claim is not covered by the bond terms. For example, if a worker files a payment bond claim two years after the project ended, and the contract said claims must be filed within one year, the claim will be denied.
If a claim is denied, the claimant's options depend on the situation. A worker might file a lawsuit against the contractor directly, though this is expensive and the contractor may have no money left. A project owner might pursue the contractor in court or file a complaint with the state licensing board. These alternatives are slower and less certain than a valid bond claim.
How bond premiums and costs work
The contractor pays the bonding company a premium to issue the bonds. The premium is typically 1 to 3 percent of the contract value, though it can be higher for riskier projects or contractors with poor payment history. A $500,000 construction contract might cost $5,000 to $15,000 in bond premiums.
The bonding company sets the premium based on the contractor's credit, experience, financial statements, and the type of work. A contractor with a strong track record and good credit pays less than one with defaults or liens on record. The contractor passes this cost to the project owner as part of the bid, so bond premiums are built into the price you pay for the work.
Frequently Asked Questions
Can a homeowner require a performance bond from a contractor?
Yes. Bonds are not required by law for private residential work, but a homeowner can request one as a condition of the contract. The contractor will add the bond premium to the bid. For large or complex projects, this is a reasonable protection.
What if the bonding company goes out of business?
Bonding companies are regulated by state insurance departments and must maintain reserves to cover claims. If a bonding company fails, the state guarantees fund typically covers unpaid claims up to a set limit, though the process can be slow. This is rare.
Can a worker file a payment bond claim if they were paid late but eventually paid in full?
No. A payment bond claim requires non-payment or partial non-payment. If the contractor eventually paid, even if late, there is no valid claim. The worker's remedy would be a lawsuit for damages caused by the late payment.
Do payment bonds cover disputes over the quality of work?
No. Payment bonds cover non-payment only. If a supplier delivered defective materials or a subcontractor did poor work, that is a quality dispute, not a payment issue. The project owner would pursue a claim against the performance bond or sue the responsible party directly.
How long does a performance bond claim take to resolve?
It depends on the complexity and size of the claim. straightforward claims may resolve in weeks; large or disputed claims can take several months. The bonding company must investigate, and if work needs to be completed, hiring a new contractor and finishing the job adds time.