Bonding / Surety Bond

A surety bond is fundamentally different from insurance, even though people often confuse them. Insurance protects you from losses. A surety bond protects the project owner from your failure to perform. There are three parties: the principal (you, the contractor), the obligee (the project owner or entity requiring the bond), and the surety (the bonding company that guarantees your performance).

Contractors encounter three main types of surety bonds. A bid bond guarantees that if you win a project bid, you'll enter into the contract at the price you quoted — typically 5-10% of the bid amount. A performance bond guarantees that you'll complete the project according to the contract terms — usually 100% of the contract value. A payment bond guarantees that you'll pay your subcontractors, suppliers, and laborers — also typically 100% of the contract value. Performance and payment bonds are often required together.

To get bonded, the surety evaluates your financial strength (working capital, net worth, cash flow), your experience and track record, your character and references, and your organizational capacity. This is essentially an underwriting process — the surety is putting its own money at risk if you fail. Bond premiums typically run 1-3% of the bond amount, depending on your financial profile and the project risk.

Bonding capacity is one of the biggest growth constraints — and competitive advantages — in construction. Federal projects over $150,000 require payment and performance bonds under the Miller Act. Many state, county, and municipal projects have similar requirements. Even some private owners require bonds on large projects.

If you can get bonded and your competitor can't, you win the bid by default. Building your bonding capacity — by maintaining strong financials, completing bonded projects successfully, and building a relationship with your surety — opens doors to larger, more profitable projects that unbondable contractors can't touch.