Performance Bonds: Cost & Requirements

A performance bond is a contract surety bond that protects a project owner if a contractor defaults on the obligations covered by the bonded contract. It provides a financial guarantee of contract performance, subject to the bond’s terms and conditions.

Need a performance bond for an awarded project or an upcoming bid? Have your contract amount, project description, required bond form, and deadline ready. Explore your options with Propeller and get help finding the right bond for your project.

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What is a performance bond?

A performance bond backs a contractor’s obligation to perform a specific contract. Three parties are involved:

Principal: The contractor whose work is bonded.
Obligee: The project owner or other party requiring the bond.
Surety: The company that issues the bond and undertakes the obligations stated in it.

Performance bonds are common on construction projects. A general contractor may need one for an owner, and a subcontractor may need one for a general contractor. The bond supports the underlying contract; it does not replace that contract.

Who needs a performance bond?

You need a performance bond when the project contract, solicitation, or applicable law requires it. Requirements depend on the owner, project type, location, and contract value.

Federal construction: FAR 28.102-1 generally requires performance and payment bonds for construction contracts exceeding $150,000, subject to authorized exceptions.
State and local public projects: Requirements and thresholds vary by jurisdiction.
Private projects: An owner, lender, or general contractor may require bonding through the contract.

Read the project’s actual bond requirements before bidding or starting work. For federal projects, confirm the applicable solicitation clauses and any agency-specific requirements. See FAR 28.102-1.

How much does a performance bond cost?

Your performance bond premium depends on the project, contract amount, bond terms, and the surety’s evaluation of your business. Financial strength, credit, experience, existing workload, and the length of the obligation can affect the quote.

The premium is the price you pay; the bond amount is the stated financial guarantee. For example, a requirement for a $500,000 performance bond does not mean you pay $500,000 to obtain it.

Illustration only: If a quote applies a 2% rate to a $500,000 contract, the calculated premium is $10,000. This is a math example, not a Propeller rate or quote. Actual pricing may use a different rate structure and include other charges.

When comparing quotes, confirm whether performance and payment bonds are included together, what term is covered, and whether contract changes could affect the premium.

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How much performance bond coverage is required?

The owner’s bond requirements and applicable law determine the amount. A bond for 100% of the contract price is common, but it is not a universal rule.

For covered federal construction contracts, FAR 28.102-2 generally requires a performance bond equal to 100% of the original contract price unless the contracting officer determines a lower amount adequately protects the government. Contract price increases generally require additional protection. See FAR 28.102-2.

Before issuance, confirm the required amount, exact obligee name, acceptable surety, and bond form. Tell Propeller about change orders or extensions that could affect an existing bond.

Performance bond vs. payment bond vs. bid bond

Common contract bonds and their purposes
Bond	Primary purpose	Typical stage
Performance	Backs the contractor’s covered obligations to perform the contract.	Contract award
Payment	Protects eligible subcontractors and suppliers against covered nonpayment.	Contract award
Bid	Backs the bidder’s commitment to enter the contract and furnish required final bonds if awarded.	Bid submission

A project may require more than one bond. A bid bond does not replace the performance and payment bonds needed after award. Explore Propeller’s contract bond options.

How does a performance bond claim work?

If an owner alleges contractor default, the bond’s notice requirements and other conditions must be considered. The surety investigates the claim and determines its obligations under the bond and contract.

Depending on the bond and circumstances, a response may involve supporting completion, arranging another contractor, or paying an amount for which the surety is liable. A dispute or unfinished work does not automatically entitle the owner to immediate payment of the full bond amount.

The contractor remains responsible for its obligations. The contractor and other indemnitors may have to reimburse the surety for covered losses and expenses under their indemnity agreement.

How do I get a performance bond?

Gather the project requirements. Obtain the contract or bid documents, bond form, amount, and deadline.
Start your request. Search for performance or performance and payment bonds in Propeller’s bond library. If you cannot find the right option, call (815) 595-2088 for help.
Complete underwriting. Supply the business and project information requested by the surety. Larger or more complex projects may need additional financial review.
Review and complete issuance. If approved, review the premium, indemnity terms, and bond details; complete the required signatures and payment, then deliver the bond as the owner requires.

What do I need to apply?

Your legal business name, ownership details, address, and contact information.
The project owner’s name, contract amount, scope of work, location, and schedule.
The required bond form, bond amount, and submission deadline.
Relevant project experience and information about current jobs and backlog.
Business financial statements and other financial or credit information requested during underwriting.

Requirements vary by project and surety. A complete submission helps avoid delays caused by missing information.

Performance bond FAQs

Is a performance bond insurance for my business?

It protects the obligee’s interest in contract performance. It does not replace general liability insurance or remove the contractor’s obligation to reimburse the surety under an indemnity agreement.

Can a small or newer contractor qualify?

Potentially. Approval depends on the contractor and project. The SBA Surety Bond Guarantee program can help eligible small businesses obtain bonds through participating sureties when conventional options are limited. Qualification is still required.

How long does approval take?

There is no single approval timeline for every performance bond. Project size, financial review, bond wording, and completeness of the application all matter. Share your bid or delivery deadline at the start of the request.

Does a performance bond cover every delay or defect?

No automatic coverage applies to every issue. Whether delays, defective work, or warranty obligations trigger the bond depends on the contract, bond wording, required procedures, and applicable law.

Is a contractor license bond the same thing?

No. A contractor license bond addresses licensing obligations. A performance bond backs obligations under a specific contract. A project may require a performance bond even if the contractor already holds a license bond.

What happens if the contract amount increases?

Notify Propeller and review the owner’s requirements. The surety may need to approve an increase or issue updated documentation, and additional premium may apply. Do not assume the existing bond automatically satisfies every change.