Bid & Performance Bonds: The Contractor’s Guide

Contract & Construction

Virtually all public construction work in America is performed by private firms — and nearly all of it is awarded through open, competitive sealed bidding to the lowest responsive bidder. Surety bonds are what make that system work. If you want to compete for public projects (and a growing share of private ones), you need to understand three bonds.

The three contract bonds

Bid bond. A guarantee that if you’re awarded the contract, you’ll enter into it and furnish the required performance bond. It stands in for the cash deposit — usually 10% of the bid — that would otherwise be forfeited if the low bidder walked away.

Performance bond. Guarantees performance of the terms of the written contract. Performance bonds often, but not always, incorporate payment and maintenance bond liability.

Payment bond. Usually issued alongside the performance bond, it forms a three-way contract between the owner, the contractor, and the surety to ensure all subcontractors, laborers, and material suppliers are paid — leaving the project lien-free. (A “payment-only” bond is rarely requested.) In bond language: the surety is the company licensed to write bonds where the work is performed; the principal is the contractor promising the contract will be executed as specified; the obligee is the entity requiring the bond.

Why owners insist on bonds

Everyone has heard the horror stories: homeowners left without kitchens for months, deposits taken for work never finished, remodels that turn into year-long battles. A performance bond ensures the contractor performs the work required by the contract or winning bid — protecting against default from faulty workmanship, late delivery, or substituted materials. If a bonded contractor defaults, the surety intervenes to fulfill the scope of work. A payment bond gives owners assurance that all suppliers and subs are paid, avoiding mechanics’ liens. An ancillary bond can additionally guarantee non-material contract requirements — compliance with special terms, laws, or regulations. The result: consumers and businesses simply feel more secure hiring a bonded contractor, and bonded contractors win more work.

What the underwriter will ask you

It is impossible to give too much information about your operation — everything helps. On a first contract bond or first financial filing, expect to cover:

Your background as a contractor: How long have you been in business? What kind of work do you specialize in? What are the three largest contracts you’ve completed? Are you a careful estimator — do you estimate yourself or employ an estimator, and who checks the estimates? Who keeps your books — you, or an experienced bookkeeper? Lists of bids you’ve submitted, photos, and press about your work all strengthen the file.

Your financial resources:

1. A full, dated financial statement — business and personal — verified against your bank; if the average balance over six to twelve months differs greatly from the statement, expect the question “why?”
2. Stocks and bonds listed specifically so value can be checked against market quotations; unlisted securities get special treatment, and anything pledged as collateral must be noted.
3. Each account receivable listed separately with debtor, due date, and (if overdue) expected payment date — noting any retainage held to completion or through a maintenance period.
4. Inventory divided into two classes: material usable on the contract at hand (a quick asset) and everything without a ready market (a fixed, slow asset).
5. Real estate described fully — type, improvements, income produced. If property is jointly owned or held in a spouse’s name, spousal indemnity may be required.
6. Your larger equipment: type, model, capacity, cost, purchase date, present value — and if you rent specialty equipment, from whom and at what rate.

A complete file makes the bond easier — and often cheaper — to obtain.

Small contractor? There’s a fast track

You don’t need a decade of CPA statements to get started. Our small-contract programs streamline underwriting for smaller bond needs — short applications that take minutes, decisions often within 24 hours, and for the smallest project tiers no financial statements at all. Because we work with dozens of surety markets — standard, commercial, and specialty — a decline from one market isn’t the end of the conversation, even for owners with challenged personal credit. And as you grow, we help you migrate out of the small programs into expanded surety credit lines rather than staying trapped where no real surety counsel is offered.

Ready to bid? Start the application at bfbond.com or call 800.921.1008.