A bond is not insurance for you; it's a three-party guarantee that protects the person you're working for, and if the bond ever pays out, you have to pay the money back. The four you will run into are the license (or permit) bond your state makes you carry, and the bid, performance, and payment bonds that show up on bigger and public jobs. Here is what each one guarantees and who it actually protects.
A bond protects the other party, not you
Every surety bond has three parties:
- The principal, which is you, the contractor.
- The surety, the bonding company that backs you.
- The obligee, the party being protected, meaning the project owner, a government body, or a licensing board.
If you default, the surety pays the obligee, and then comes after you to recover every dollar it paid. So a bond is closer to a line of credit than to insurance: it protects the other side and leaves you owing the money. That "you pay it back" mechanic is the whole difference between a bond and an insurance policy, covered in Surety bonds vs insurance.
License and permit bonds
Most state licensing regimes require a license bond before they issue your contractor license. It protects consumers and the public against a contractor's violations of license law, code violations, unpaid wages, and contract fraud.
Key features:
- It is not project-specific. One license bond covers all your work during the license period.
- If a valid claim is paid, you repay the surety and must restore the bond to its full amount to keep your license in good standing.
- The required amount is set by each state, and sometimes each city, and varies widely. Some states impose no statewide bond but require local municipal bonds instead.
Because bond amounts and even whether a bond is required at all are state and local decisions, route the exact figure to Working in Your State.
Bid bonds
A bid bond guarantees that if you win the job, you will actually sign the contract at your bid price and provide the required performance and payment bonds. It protects the owner from a low bidder who wins and then walks.
- It is usually issued at no charge once you have a bond program, as the entry point to the bigger bonds.
- The bid bond amount is typically a percentage of your bid; the exact figure is set by the solicitation.
- If you back out after winning, the surety covers the owner's added cost to go to the next bidder, then bills you.
Performance bonds
A performance bond guarantees that you will complete the contract according to its terms. If you default, the surety has options, and it chooses:
- Finance your completion of the work, or
- Bring in a replacement contractor to finish, or
- Pay the owner's damages, up to the bond amount.
Performance bonds are standard on public work and common on large private projects. Again, if the surety pays, you owe it back.
Payment bonds
A payment bond guarantees that you will pay your subcontractors and material suppliers. It exists mainly on public work, where you generally cannot file a mechanics lien against government property, so the payment bond is the subs' and suppliers' main protection instead of a lien.
If you are a sub or supplier trying to collect on someone else's payment bond, that is a different process; see Bond claims on public projects and Will a lien actually get me paid.
When bonds are required: the Miller Act and its state cousins
On federal construction contracts over a set dollar threshold (the Federal Acquisition Regulation sets it at $150,000 in 2026; verify at acquisition.gov), performance and payment bonds are required. The payment bond must equal 100% of the contract value, and the performance bond is set as a percentage of the contract, commonly the full amount.
Every state has its own "Little Miller Act" covering state and local public work, and the dollar threshold where bonds kick in varies enormously, from any-value in some states to six figures in others. Route the threshold and amounts for your state to Working in Your State.
Common questions
Does a contractor bond protect me or the customer?
It protects the customer, owner, or licensing board, not you. A bond guarantees your performance to the other party, and if it pays a claim, you have to repay the surety in full. That is the core difference from insurance, which pays your losses. Think of a bond as the surety vouching for you on credit: it makes the other side whole if you fail, then collects the money back from you, often reaching your personal assets under the indemnity agreement you signed.
What's the difference between a performance bond and a payment bond?
A performance bond guarantees you will finish the job per the contract; a payment bond guarantees you will pay your subs and suppliers. If you default on performance, the surety finances completion, hires a replacement, or pays the owner's damages. If you fail to pay subs, they claim against the payment bond. On public work the payment bond replaces the mechanics lien that subs cannot file against government property. Big jobs usually require both.
Do I have to pay back a bond claim?
Yes. Unlike insurance, a surety bond is not designed to absorb a loss; if the surety pays a claim, it has full recourse to recover everything from you. When you got bonded you signed an indemnity agreement, often backed by your personal assets and sometimes your spouse's. So a paid bond claim is a debt you will repay, not a loss someone else eats. Treat bonded work accordingly, and read the indemnity agreement before you sign it.
What's the difference between a bond and insurance?
Insurance is a two-party deal that pays your covered losses and expects to; a surety bond is a three-party guarantee that protects someone else and expects to be paid back. With insurance, the carrier pools risk and absorbs losses. With a bond, the surety underwrites you like a lender, and if it has to pay the owner or a sub, it collects that money back from you. That is why getting bonded depends on your finances and credit, not just paying a premium.
When are bid, performance, and payment bonds required?
On public work above a dollar threshold, and often on large private projects by contract. Federal jobs over $150,000 in 2026 require performance and payment bonds under the Federal Acquisition Regulation. Every state has a Little Miller Act with its own threshold for state and local public work, ranging from any value to six figures. Private owners and GCs can also require bonds by contract on big jobs. Route the threshold for your state to Working in Your State and verify federal figures at acquisition.gov.
The honest bit
- License-bond requirements and amounts, and the public-work thresholds that trigger bid, performance, and payment bonds, are set by each state and locality. Route the exact numbers to Working in Your State.
- The Miller Act threshold and the 100% payment-bond rule are federal figures that can change, so verify current requirements at acquisition.gov before bidding federal work.
- This is general guidance, not legal or financial advice. A bond comes with an indemnity agreement that can reach your personal assets, so have it reviewed before you sign.
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Templates you might need
Sources
- 40 U.S.C. 3131 - Bonds of contractors of public buildings or works · The Miller Act: on a federal construction contract above the statutory threshold the prime must furnish BOTH a performance bond and a separate payment bond, which is where the performance/payment distinction comes from
- SBA - Surety bonds · The Surety Bond Guarantee program, which exists because a small or newly formed contractor is the one a surety is least willing to bond without it
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