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Construction & Contractor Bond Guide

In this Construction & Contractor Bond Guide, you’ll learn how the most common construction bonds—bid, performance, payment, and maintenance—work together to protect project owners, ensure subcontractors and suppliers are paid, and keep public funds secure. 

We’ll break down why these bonds are required, what each one guarantees, how they support project completion, and what contractors should prepare before bidding or applying. 

By the end, you’ll understand the essential role surety bonds play in building trust, reducing risk, and supporting successful construction projects.


What Construction Bonds Guarantee -- Construction bonds ensure contractors submit honest bids, complete work as agreed, pay subcontractors and suppliers, and protect public funds from financial loss.

Performance Bond vs. Payment BondBid Bond vs. Performance BondSubdivision Bond vs. Maintenance BondHow Surety Bonds Work in ConstructionContractor Prequalification ChecklistContractor Bond Costs and How They Work

Performance Bond vs. Payment Bond

Performance and payment bonds are often issued together, but they serve different purposes.

Performance Bond

A performance bond guarantees that the contractor will complete the project according to the contract terms. If the contractor defaults, the surety may:

  • Finance the contractor
  • Hire a replacement contractor
  • Pay damages up to the bond amount

Performance bonds protect project owners.

Payment Bond

A payment bond guarantees that subcontractors, laborers, and suppliers will be paid. If the contractor fails to pay, claimants can file against the bond.

Payment bonds protect subcontractors and suppliers.

Key Difference

  • Performance bond: ensures the work gets done
  • Payment bond: ensures everyone gets paid

Both are required on most public projects and many private commercial jobs.


Key Takeaway -- Performance and payment bonds work as a pair: one guarantees the work gets done, the other guarantees everyone on the project gets paid.

Bid Bond vs. Performance Bond

Bid bonds and performance bonds work together during different stages of the project.

Bid Bond

A bid bond guarantees that the contractor:

  • Submits a serious, accurate bid
  • Will sign the contract if awarded
  • Will provide performance and payment bonds

If the contractor backs out, the surety covers the difference between the winning bid and the next lowest bid.

Performance Bond

Issued after the contract is awarded, the performance bond guarantees the contractor will complete the project.

Key Difference

  • Bid bond: protects the bidding process
  • Performance bond: protects the construction process

Subdivision Bond vs. Maintenance Bond

These bonds are common in land development and municipal improvement projects.

Subdivision Bond

A subdivision bond guarantees that a developer will complete required public improvements such as:

  • Roads
  • Sidewalks
  • Utilities
  • Drainage systems

Municipalities require these bonds before approving development plans.

Maintenance Bond

A maintenance bond guarantees that the contractor will repair defects in workmanship or materials for a specified period after project completion (often 12–24 months).

Key Difference

  • Subdivision bond: guarantees construction of public improvements
  • Maintenance bond: guarantees the quality of completed work

How Surety Bonds Work in Construction

Construction surety bonds function as a financial guarantee that the contractor will fulfill their obligations. They protect project owners, taxpayers, and subcontractors from financial loss.

How They Work

  1. Contractor applies for bonding The surety reviews financials, experience, and credit.
  2. Bond is issued The contractor pays a premium (usually 1–3%).
  3. Project begins The contractor performs the work.
  4. If issues arise The surety investigates claims.
  5. Surety resolves valid claims Then seeks reimbursement from the contractor.

Surety bonds are not insurance — they are a credit guarantee.

Contractor Prequalification Checklist

Sureties evaluate contractors carefully before issuing bonds. Strong contractors typically demonstrate:

Financial Strength

  • Solid working capital
  • Positive net worth
  • Clean financial statements

Experience & Track Record

  • Successful completion of similar projects
  • Strong project management history

Operational Capacity

  • Adequate staffing
  • Equipment and resources
  • Proven systems and controls

Reputation & Character

  • Good references
  • Ethical business practices
  • No major disputes or claims

Prequalification ensures contractors can responsibly handle bonded work.

Contractor Bond Costs and How They Work

Bond premiums are typically a small percentage of the total contract value.

Typical Rates

  • Standard contractors: 1–3%
  • New or credit‑challenged contractors: 3–10%

What Affects Pricing

  • Contractor credit
  • Financial strength
  • Project size and complexity
  • Past claims history
  • Work program size

Surety underwriting is similar to extending credit — stronger contractors receive better rates and higher bonding capacity.

Pro Tip for First‑Time Construction & Contractor Bond Buyers -- Strong credit, clean financials, and a clear explanation of your business operations can significantly reduce your bond rate and speed up approval.

Explore our Construction & Contractor Bond Hub