On a construction project, the contractor pays for the performance bond by writing the premium check to the surety, but the cost is folded into the bid, so the project owner funds it indirectly through the contract price. The premium generally runs between 0.5% and 2.5% of the contract value, and the owner never receives a separate invoice from the surety.
How the Contractor Pays the Surety
The contractor is the party that applies for the bond, signs the paperwork, and pays the premium out of pocket before any work begins. Before issuing the bond, the surety requires the contractor to sign an indemnity agreement, a separate legal contract making the contractor personally responsible for any losses the surety pays out on a claim. That personal guarantee often reaches beyond the business itself. Sureties routinely require company owners and their spouses to sign, which puts personal assets on the line alongside business assets.
Once the surety approves the application and receives the premium, it issues the bond document along with a power of attorney form. The contractor then delivers this paperwork to the project owner, who confirms the bond meets the coverage limits spelled out in the contract. On federal construction projects, the contractor must furnish all required bonds before receiving a notice to proceed with any work.1Acquisition.gov. Subpart 28.1 – Bonds and Other Financial Protections
How the Cost Reaches the Owner
Even though the contractor writes the check, the financial weight of the bond shifts to the owner through the contract price. Standard industry practice calls for contractors to fold all project costs, including the bond premium, into their bid. When the owner accepts the bid, the total already accounts for the cost of the bond. The owner pays the bond without ever seeing a line for it.
Some larger projects handle this differently. The contract may include a reimbursement clause that treats the bond premium as a separately billable expense rather than part of the general bid. These arrangements are less common but give the owner clear visibility into what the bond costs. Either way, the owner is the party that ultimately funds the performance guarantee. The contractor simply handles the transaction with the surety on the owner’s behalf.
What the Premium Costs
Surety companies price the bond based on project size and contractor risk. The single biggest factor is the total contract value. Larger projects carry higher absolute premiums but often lower percentage rates. Federal Highway Administration research found that premiums on small projects under $100,000 averaged roughly 1% to 2.5% of the contract amount, while premiums on projects exceeding $50 million averaged around 0.5% to 0.85%.2Federal Highway Administration. Chapter 4 – Benefit-Cost Analysis of Performance Bonds
Beyond project size, sureties evaluate the contractor’s financial health by reviewing financial statements, cash flow, working capital, and debt levels. Strong credit and a track record of completing similar projects on time lead to lower premiums. Newer contractors, or those with thin financials, face higher rates because the surety views them as a greater risk. Because the contractor passes the premium through to the owner, a stronger contractor generally means a lower embedded bond cost in the bid.
When a Performance Bond Is Actually Required
Before worrying about who pays, it helps to know whether a bond is required at all. That depends on whether the project is public or private, and which level of government is involved.
Federal Projects
The Miller Act requires both a performance bond and a payment bond on any federal construction contract exceeding $100,000.3Office of the Law Revision Counsel. 40 USC 3131 – Bonds of Contractors of Public Buildings or Works The performance bond protects the government against a contractor who fails to finish the job. The payment bond protects subcontractors and material suppliers by guaranteeing they get paid even if the contractor defaults. The Federal Acquisition Regulation implements the bond requirement at a threshold of $150,000 for federal procurement.4eCFR. 48 CFR 28.102-1 – General
State and Local Public Projects
Every state has adopted its own version of the Miller Act, commonly called a “Little Miller Act,” requiring performance and payment bonds on state-funded public construction. Dollar thresholds vary widely by state, from as low as $25,000 up to $100,000 or more. Some states require bonds covering only a percentage of the contract value rather than the full amount.
Private Projects
No federal or state law requires a performance bond on a private construction project. The decision rests entirely with the property owner. Private owners often require bonds when a construction lender makes bonding a condition of financing, when the project is large relative to the contractor’s size, or when the owner simply wants the added security of knowing a surety has vetted the contractor’s finances and will step in if the work stalls. When a private owner requires a bond, the same payment path applies: the contractor buys it and adds the cost to the bid.
Payment vs. Performance Bonds
Performance bonds and payment bonds are separate instruments that protect different parties, though they are almost always required together on public projects. A performance bond guarantees that the contractor will complete the project according to contract terms and protects the owner. A payment bond guarantees that the contractor will pay its subcontractors, suppliers, and laborers and protects the workers and vendors downstream. Under the Miller Act, the payment bond must equal the full contract amount unless the contracting officer determines a lower amount is appropriate, and the payment bond can never be less than the performance bond.3Office of the Law Revision Counsel. 40 USC 3131 – Bonds of Contractors of Public Buildings or Works
Both bonds are typically purchased together from the same surety, and the combined premium is what the contractor includes in its bid. When people talk about “the cost of the bond,” they usually mean the combined cost of both.
Who Pays if the Bond Is Called
The payment structure changes if the owner has to file a claim. The surety pays the owner first, but the surety does not absorb the loss. Under the indemnity agreement, it has the legal right to recover every dollar it spends from the contractor and any other parties who signed the indemnity, including company owners and their spouses.
If the contractor abandons the project, falls significantly behind schedule, or fails to meet contract specifications, the owner can file a written claim with the surety, documenting the breach with default notices, photographs of deficient work, and the contract itself. The surety investigates. If it confirms the default, it typically has several options: arrange for the original contractor to cure the default, hire a replacement contractor to finish the job, or pay the owner the cost of completion up to the bond’s face value.
Whichever path the surety takes, it then turns to the contractor for reimbursement. That recovery right is reinforced by a legal doctrine called equitable subrogation, which allows a surety that fulfills its bond obligations to step into the owner’s shoes and assert the owner’s rights against the contractor to recoup its costs.5United States Court of Federal Claims. Commercial Casualty Insurance Company of Georgia v. The United States The contractor may end up paying far more than the original premium, covering the surety’s claim payments, legal fees, and administrative costs. If the surety can demand collateral before or during a claim, it can also require the contractor to deposit cash, a letter of credit, a certificate of deposit, or real property in an amount the surety considers sufficient to cover potential losses.
So the short version holds even in a claim scenario. The owner does not pay for the failure. The contractor does, both through the premium built into the bid and through the indemnity obligation that follows the bond.