A performance bond usually costs between 0.5% and 3% of the contract price for a financially solid contractor, and can run 5% or higher for newer firms or those with weaker credit. The premium is not a flat percentage. Surety companies use a tiered rate that drops as the contract value climbs, then adjust the number up or down based on the contractor’s finances, experience, and claims history.
What the Premium Is a Percentage Of
The premium is calculated against the bond’s “penal sum,” which is the maximum the surety would owe if the contractor defaults. On federal construction contracts over $150,000, the Federal Acquisition Regulation sets that amount at 100% of the contract price unless the contracting officer decides a smaller bond is enough.1Acquisition.GOV. 48 CFR 28.102-2 – Amount Required The underlying statute, 40 U.S.C. § 3131, leaves the exact figure to the contracting officer’s judgment, but 100% is what contractors see on virtually every federal job.2Office of the Law Revision Counsel. 40 USC 3131 – Bonds of Contractors of Public Buildings or Works
Private owners have more flexibility. Some require bonds at 50% or 75% of the contract value, which cuts the surety’s exposure and roughly cuts the premium in proportion. A $10 million project bonded at 100% costs about twice what the same project bonded at 50% costs.
The Tiered Rate Schedule
Sureties charge less per dollar as the bond amount grows, because the fixed cost of underwriting spreads across a larger base. A typical schedule for a well-qualified general contractor looks like this:
- First $100,000: $25 per $1,000 (2.5%)
- Next $400,000: $15–$20 per $1,000 (1.5%–2.0%)
- Next $500,000: $10–$15 per $1,000 (1.0%–1.5%)
- Above $1,000,000: $10 per $1,000 or less (1.0% or below)
Put dollars to it. A $2 million performance bond under these rates: the first $100,000 costs $2,500. The next $400,000 at $15 per $1,000 adds $6,000. The next $500,000 at $12.50 per $1,000 adds $6,250. The remaining $1,000,000 at $10 per $1,000 adds $10,000. The total comes to $24,750, or about 1.24% on the full $2 million. A $500,000 bond, by contrast, works out closer to 1.7%–2.0% effective. Scale gets rewarded.
These rates assume a financially strong contractor with solid credit and a real track record. What any individual contractor actually pays depends on underwriting.
What Moves Your Rate
Underwriters evaluate risk through what the industry calls the Three Cs: character, capacity, and capital. Capital carries the most weight, but a serious problem in any of the three can push a rate from 1% into the 3%–5% range, or lead to a flat denial.
Character
Character covers credit reports on both the business and its owners, prior bond claims, and history of disputes with subcontractors, suppliers, and owners. A paid claim on a prior bond is a red flag that inflates premiums for years. Frequent late payments and unresolved liens do the same on a smaller scale. Personal credit scores above 700, a clean claims history, and strong references from past owners support the lowest rates the surety offers.
Capacity
Capacity is whether the contractor can actually build the job. Underwriters look at the largest project completed to date, the strength of the management team, equipment, and experience with the specific type of work. A contractor whose biggest completed job was $3 million bidding on a $12 million project will face a rate premium, because the surety is betting on an unproven scale. Technically complex work, such as a wastewater plant or a bridge retrofit, also prices higher than a routine commercial building at the same dollar value.
Capital
Most bond decisions turn here. Underwriters want CPA-prepared financial statements, and audited GAAP statements for larger bonds. The metric that matters most is working capital, current assets minus current liabilities. As a rough industry benchmark, working capital supports about ten times its value in bonding capacity, so $500,000 in working capital generally supports around $5 million in total bonded work.3U.S. Small Business Administration. SBA Surety Bond Guarantee Program Small Business Outreach Debt-to-equity, profit margins, and backlog also factor in. A contractor stretched past its financial capacity will either be declined or quoted a penalty rate of 3% or more.
Contract Terms and Market Factors
Aggressive liquidated-damages clauses, unfavorable retainage schedules, and design-build contracts where the contractor takes on design risk all raise the surety’s exposure. Geographic location and local market conditions can nudge the rate as well. None of these alone will double a premium, but stacked they move the number meaningfully.
Performance and Payment Bonds Are Usually Priced Together
Most bonded projects require both a performance bond and a payment bond, and federal projects require both whenever the contract exceeds $150,000.4Acquisition.GOV. 48 CFR 28.102-1 – General Sureties typically bundle the two into a single premium. When you see the “1% to 3% of the contract” figure quoted, it almost always covers both bonds, not the performance bond by itself. Confirm what a quote includes before you plug it into a bid.
Renewals and Surcharges on Longer Projects
A standard premium covers one year from the contract date. If the project runs longer, the surety charges a renewal premium at each anniversary based on the value of uncompleted work at that point. Renewal premiums shrink each year as remaining work shrinks, but they still need to be in the budget from day one.
Extended maintenance or warranty periods add surcharges. A 24-month maintenance obligation adds roughly $1.50 to $2.00 per $1,000 of the bond amount on top of the base premium. Design-build contracts commonly attract surcharges too. Ask the surety to spell out renewal costs and surcharges before you submit a bid.
The SBA Route for Contractors Who Can’t Qualify Otherwise
Small and emerging contractors who can’t get bonded through the standard market have a federal backstop. The SBA’s Surety Bond Guarantee Program guarantees part of the surety’s loss if the contractor defaults, which makes sureties willing to write bonds they’d otherwise decline. The SBA currently guarantees bonds on contracts up to $9 million for non-federal projects and up to $14 million for federal contracts; federal contracts above $9 million need a contracting officer’s certification.5U.S. Small Business Administration. Surety Bonds6U.S. Small Business Administration. SBA Announces Statutory Increases for Surety Bond Guarantee Program
The guarantee covers up to 90% of the surety’s loss on eligible bonds.7Office of the Law Revision Counsel. 15 USC 694b – Surety Bond Guarantees The contractor pays the SBA a guarantee fee of 0.6% of the contract price, on top of the surety’s premium.5U.S. Small Business Administration. Surety Bonds On a $1 million contract, that’s $6,000 in addition to whatever the surety charges. The program doesn’t make bonds cheap, but it makes them available to contractors who would otherwise be locked out.
Costs the Premium Doesn’t Cover
The General Indemnity Agreement
Every performance bond comes with a General Indemnity Agreement, signed by the contractor’s owners and almost always their spouses before the bond is issued. The GIA makes those individuals personally liable to reimburse the surety for every dollar it pays out on a claim, plus legal fees, investigative costs, and consultant expenses. It also gives the surety the right to demand collateral if a claim looks likely, examine the contractor’s books, and take an assignment of the contractor’s rights under the bonded contract.
The premium is a known, budgetable number. The GIA is an open-ended contingent liability sitting behind every bonded project, and it survives the project itself since claims can surface months after completion. Spouses who co-sign are putting personal savings, home equity, and investment accounts on the line regardless of their day-to-day involvement in the business. Read it before you sign.
Collateral
When a surety is willing to write a bond but not comfortable with the risk, it may require collateral as a condition. Collateral is a security deposit, not a fee, and the surety holds it and can draw on it if a claim is paid. Cash deposits and irrevocable letters of credit from a bank are the most commonly accepted forms. Certificates of deposit are generally not accepted because their maturity dates rarely align with the bond term.
The real cost of a collateral requirement is opportunity cost. Cash or a letter of credit tied up on one project reduces the working capital that supports the rest of the contractor’s bonding capacity. A $200,000 collateral post is $200,000 not available to support other bonded work until the contract is completed and the bond released. On a multi-year project, that money is frozen for the duration.
Tax Treatment
Performance bond premiums are deductible as ordinary and necessary business expenses tied to securing and performing a contract. The premium, the SBA guarantee fee if it applies, and any ancillary surety charges all go on the books as project costs. Collateral itself is not deductible since it’s a deposit rather than an expense, but fees to maintain an irrevocable letter of credit are. Allocate bond costs to specific jobs in your accounting system so they land in the right project cost reports instead of getting buried in overhead.