Under 40 USC 3131, any federal construction contract worth more than $100,000 requires the contractor to furnish two bonds before the contract is awarded: a performance bond that protects the government if the work isn’t completed, and a payment bond that protects the subcontractors and suppliers who furnish labor or materials. The Federal Acquisition Regulation raises the floor for full bonding to contracts over $150,000, and each bond generally equals 100 percent of the original contract price.1Office of the Law Revision Counsel. 40 USC 3131 – Bonds of Contractors of Public Buildings or Works2Acquisition.GOV. FAR 28.102-1 General These bonds exist because federal property can’t be reached by a mechanic’s lien, so the bonds are the substitute safety net for anyone the contractor might leave holding the bag.
The Two Bonds You Must Post
The statute requires two distinct instruments, each protecting a different party.
The performance bond guarantees the government that you will finish the project according to the contract. If you default, the surety company must either arrange for another contractor to complete the work or compensate the government for its losses.
The payment bond protects every person who supplies labor or materials for the project. Because workers and suppliers can’t file a lien against federal property the way they could on a private job, the payment bond gives them a financial backstop if the prime contractor doesn’t pay. Subcontractors and material suppliers aren’t parties to the bond agreement itself, but they can make a claim against it, and if necessary sue the surety directly.
Both bonds have to be in place before the contract is awarded. Work does not start until the bonds are furnished.2Acquisition.GOV. FAR 28.102-1 General
Dollar Thresholds That Trigger the Requirement
The statute sets the bond trigger at contracts “of more than $100,000.”1Office of the Law Revision Counsel. 40 USC 3131 – Bonds of Contractors of Public Buildings or Works The FAR, however, requires full performance and payment bonds only for contracts exceeding $150,000.2Acquisition.GOV. FAR 28.102-1 General
For contracts between $35,000 and $150,000, the contracting officer selects from a menu of alternative payment protections. Those alternatives can include a payment bond, an irrevocable letter of credit, a tripartite escrow agreement, or certificates of deposit. Contracts at or below $35,000 do not carry the same payment protection requirement.
How Much Each Bond Must Cover
Under the FAR’s standard bond clause, the performance bond and the payment bond each equal 100 percent of the original contract price at the time of award.3Acquisition.GOV. 48 CFR 52.228-15 – Performance and Payment Bonds-Construction
The statute gives the contracting officer some flexibility on the performance bond, allowing an amount the officer “considers adequate.” In practice, 100 percent is standard. For the payment bond, the statute says it must equal the total contract price unless the officer determines in writing that a bond in that amount is impractical, and even then the payment bond can’t drop below the amount of the performance bond.1Office of the Law Revision Counsel. 40 USC 3131 – Bonds of Contractors of Public Buildings or Works
Bid Bonds Before You Win the Job
Before the performance and payment bonds ever come into play, the solicitation itself typically requires a bid bond, sometimes called a bid guarantee. A bid bond ensures that if you submit the winning bid, you actually follow through by executing the contract and furnishing the required performance and payment bonds. If you walk away after winning, the bid bond compensates the government for the cost of re-soliciting or moving to the next bidder.
The FAR requires bid guarantees of at least 20 percent of the bid price, capped at $3 million.4govinfo.gov. Federal Acquisition Regulation 48 CFR Part 28 In sealed bidding, submitting a bid without the required guarantee generally means your bid is rejected outright. The contracting officer can waive the requirement in limited situations, such as when only one offer is received or when the shortfall in the guarantee amount is less than the gap between the winning bid and the next acceptable offer.
Who’s on the Bond
Every bond involves three parties. The principal is you, the contractor who must obtain the bond and fulfill the contract. The surety is the company guaranteeing your performance; if you default, the surety steps in. Sureties that write bonds on federal projects must appear on the Department of the Treasury’s Circular 570 list of approved companies.5Bureau of the Fiscal Service. Surety Bonds The obligee is the federal agency that commissioned the project and holds the right to enforce the bond.
Sureties don’t issue bonds to just anyone. Before writing a bond, the surety evaluates your financial health, credit history, past project track record, and available working capital. If the surety considers you high-risk, it may require collateral, charge a higher premium, or decline coverage outright.
When You Can’t Get a Traditional Bond
Contractors who can’t secure bonds through conventional underwriting have two main paths.
SBA Surety Bond Guarantee Program
The SBA’s Surety Bond Guarantee program reduces the surety’s risk by guaranteeing a portion of the bond. It backs bid, performance, payment, and ancillary bonds for qualifying small businesses, covering contracts up to $9 million for non-federal projects and up to $14 million for federal projects.6U.S. Small Business Administration. Surety Bonds
To qualify, you must meet SBA size standards for a small business, pass the surety’s own evaluation of credit, capacity, and character, and pay the SBA a guarantee fee of 0.6 percent of the contract price. The SBA does not charge a fee for bid bond guarantees.
Alternatives to Corporate Sureties
The FAR also lets you substitute other forms of security in place of a corporate or individual surety, provided the security equals the penal sum of the required bond.7Acquisition.GOV. FAR 28.204 Alternatives in Lieu of Corporate or Individual Sureties Accepted substitutes include U.S. bonds or notes deposited at par value, cash equivalents (certified checks, cashier’s checks, bank drafts, postal money orders, or currency), and irrevocable letters of credit from a federally insured, investment-grade financial institution. A separate ILC is needed for each bond, and for performance or payment bonds the ILC must either cover the entire required period or automatically renew annually until coverage is no longer needed.8Acquisition.GOV. Irrevocable Letter of Credit
You can combine these alternatives with each other or with traditional surety bonds, and you can swap one type of security for another during the life of the contract as long as the replacement meets the same requirements.
What Happens If You Don’t Furnish the Bonds
The contracting agency can terminate the contract outright if the required bonds aren’t in place before work begins. That’s the immediate consequence. The longer-term consequences reach further.
A contractor who willfully fails to perform, or who has a history of poor performance on government contracts, faces potential debarment from competing for any federally funded work. Debarment generally lasts up to three years, though drug-free workplace violations can extend it to five years.9eCFR. 48 CFR 9.406-4 – Period of Debarment Grounds for debarment include fraud in obtaining or performing a contract, antitrust violations related to bid submissions, embezzlement, bribery, making false statements, and any offense that reflects a serious lack of business integrity.10Acquisition.GOV. 48 CFR 9.406-2 – Causes for Debarment
A contractor who proceeds without the required bonds and causes financial losses to the government or to unpaid subcontractors can also be held personally liable. Where knowingly false claims are involved, the False Claims Act authorizes triple the government’s damages plus a per-violation civil penalty that is adjusted for inflation annually.11United States Department of Justice. The False Claims Act
Making a Claim on the Payment Bond
The payment bond is only useful if unpaid subcontractors and suppliers know how to reach it. Section 3133 of Title 40 sets the process, and the deadlines are unforgiving.
If you have a direct contract with the prime and haven’t been paid within 90 days after your last day of work or your final material delivery, you can sue on the payment bond in federal district court. No advance written notice to the prime is required. The suit must be filed no later than one year after the last labor was performed or material supplied.12Office of the Law Revision Counsel. 40 USC 3133 – Rights of Persons Furnishing Labor or Material
If you supplied labor or materials to a subcontractor rather than to the prime, you face an added step: written notice to the prime contractor within 90 days of your last work or delivery, stating with substantial accuracy the amount owed and identifying who you furnished the labor or materials to. The notice must be served by a method that gives written, third-party verification of delivery to the prime’s office, place of business, or residence. Certified mail with return receipt requested is the common method. The same one-year deadline for filing suit applies once notice is given.
Any waiver of the right to sue on a payment bond is void unless it’s in writing, signed by the person waiving the right, and signed only after that person has already started furnishing labor or materials on the project.3Acquisition.GOV. 48 CFR 52.228-15 – Performance and Payment Bonds-Construction A blanket waiver buried in a subcontract before work begins has no effect.
One boundary worth noting: 40 USC 3131 and 3133 apply to federal construction contracts. State and local public works, and private construction, sit under different bonding statutes and lien laws, so the thresholds, deadlines, and claim procedures described here don’t carry over automatically.