Government Performance Bonds: Complete Guide for Contractors

Quick Overview: Government Performance Bonds

Performance bonds guarantee that a contractor will complete a project according to contract terms. For federal construction contracts over $150,000, the Miller Act requires both performance and payment bonds at 100% of contract value. Understanding bonding is essential for government contractors.

$150K+

Bond Threshold (Federal)

100%

Typical Coverage

1-3%

Premium Rate

SBA

Guarantee Available

Types of Contract Bonds

Government contractors typically need three types of surety bonds. Understanding each helps you prepare for bonding requirements before bidding.

Bid Bond

Guarantees you'll enter into the contract at your bid price if awarded.

• Typically 5-20% of bid amount
• Required with proposal submission
• Protects agency from low bidders backing out
• Often free from surety if you have bonding line

Performance Bond

Guarantees you'll complete the contract according to its terms.

• 100% of contract value
• Required at contract award
• Surety will complete project if you default
• Remains active until project completion

Payment Bond

Guarantees you'll pay subcontractors and suppliers.

• 100% of contract value
• Required at contract award
• Protects subs and suppliers
• Replaces mechanic's lien rights

Miller Act Requirements

The Miller Act (40 U.S.C. § 3131-3134) mandates bonding for federal construction contracts. Most states have similar "Little Miller Acts" for state contracts.

Federal Bonding Thresholds

Contract Value	Performance Bond	Payment Bond
Under $35,000	Not required	Not required
$35,000 - $150,000	CO discretion	CO discretion
$150,000 - $1 million	100% required	100% required
Over $1 million	100% required	100% required (may vary)

State & Local Variations

State bonding requirements vary significantly. Some states require bonds on contracts as low as $25,000, while others have higher thresholds. Always check specific requirements in the solicitation.

Bond Costs & Premium Rates

Bond premiums are calculated as a percentage of the contract value. Your rate depends on your credit, experience, and financial strength.

Typical Premium Rates

Excellent Credit (700+)1% - 1.5%

Good Credit (650-699)1.5% - 2%

Fair Credit (600-649)2% - 3%

Challenged Credit (<600)3% - 5%+

Example Cost Calculation

For a $500,000 contract with 1.5% premium rate:

Performance Bond (100%):$500,000

Premium (1.5%):$7,500

Payment Bond (100%):$500,000

Premium (1.5%):$7,500

Total Bond Premium:$15,000(3% of contract)

How to Obtain Surety Bonds

Getting bonded requires working with a surety company through a bond producer (agent). Here's the process:

Step-by-Step Process

Find a Bond Producer

Work with a licensed surety bond agent who specializes in construction bonds. They represent multiple sureties and can find the best fit for your situation.

Submit Financial Documentation

Prepare and submit:

• Personal financial statements (all owners)
• Business financial statements (2-3 years)
• Work-in-progress schedule
• Bank reference letter
• Resume of key personnel

Surety Underwriting

The surety evaluates your "Three C's": Character (integrity and reputation), Capacity (experience and ability), and Capital (financial strength).

Receive Bonding Line

If approved, you'll receive a bonding line—the maximum amount you can bond. This includes both single job limit and aggregate (total) limit.

Building Bonding Capacity

Your bonding capacity limits the size of contracts you can pursue. Here's how to increase it over time:

Factors Affecting Capacity

•
Working Capital
Current assets minus current liabilities
•
Net Worth
Total assets minus total liabilities
•
Backlog
Uncompleted work from existing contracts
•
Track Record
History of completing projects profitably

How to Increase Capacity

→Maintain strong cash reserves and working capital
→Complete projects profitably and on time
→Maintain excellent credit (personal and business)
→Build relationships with your surety
→Gradually increase project size (don't overreach)
→Use an experienced CPA for financial statements

Rule of Thumb

Many sureties use a 10:1 or 15:1 working capital multiplier. If you have $100,000 in working capital, expect a bonding capacity of $1-1.5 million. Strong companies with excellent track records may achieve higher ratios.

SBA Surety Bond Guarantee Program

The SBA offers a bond guarantee program to help small and emerging contractors who can't obtain bonds through regular channels.

Program Overview

Prior Approval Program

SBA guarantees up to 90% of losses on bonds up to $6.5 million. Surety must get SBA approval before issuing bond.

Preferred Surety Program

Pre-approved sureties can issue SBA-guaranteed bonds up to $6.5 million without prior SBA approval. Faster process.

Eligibility

• Small business (SBA size standards)
• Cannot obtain bonding through regular channels
• Technically capable and experienced
• Adequate capital and equipment

Bond Limits

• Up to $6.5 million per contract
• Up to $10 million aggregate
• Federal contracts eligible

How to Apply

Work with an SBA-participating surety agent. They'll submit your application to SBA. The fee is approximately 0.7% of contract price, in addition to regular bond premiums. Visit sba.gov/surety-bonds for more information.

Common Bonding Issues & Solutions

Issue: Declined Due to Credit

Personal credit issues are a common reason for bond denial.

Solution: Work on improving personal credit. Consider SBA bond guarantee program. Some sureties specialize in "second chance" bonding at higher premiums.

Issue: Insufficient Financial Statements

Incomplete or unprepared financials delay or prevent bonding.

Solution: Work with a CPA experienced in construction accounting. Prepare complete statements including work-in-progress schedules. Reviewed or audited statements are stronger than compiled.

Issue: Limited Track Record

New contractors struggle to get bonding without project history.

Solution: Start with smaller projects to build history. Highlight key personnel's experience from previous employers. Consider subcontracting to build track record before pursuing bonded prime work.

Issue: Project Too Large

Attempting to bid projects beyond current bonding capacity.

Solution: Know your limits before bidding. Increase capacity gradually with profitable projects. Consider joint ventures with larger, bonded partners for bigger opportunities.

Frequently Asked Questions

Is the bond premium a one-time cost?

Yes, the premium is typically paid upfront when the bond is issued. For multi-year projects, you may pay annually. The premium is not refundable if the project is cancelled or scope is reduced.

What happens if I can't complete the project?

The surety has options: finance you to complete, take over the project, bring in a new contractor, or pay the project owner. The surety will then seek reimbursement from you for any losses—bonding is not insurance.

Do I need to provide collateral?

Strong applicants typically don't need collateral. However, sureties may require collateral for higher-risk accounts, new relationships, or large projects. Personal indemnity agreements are standard.

How long does it take to get bonded?

Initial bonding relationship setup takes 2-4 weeks with complete documentation. Once you have a relationship established, individual bonds can often be issued in 24-48 hours.

Can I bond a project after winning the bid?

You should have bonding capacity confirmed before bidding. Winning a bid without confirmed bonding puts you at risk—if you can't provide the required bonds, you may forfeit your bid bond and face debarment.

Find Bondable Contract Opportunities

BidFinds helps you find government contracts matched to your bonding capacity. Filter by contract value to focus on opportunities you can actually pursue.

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Related Resources

Bonding Requirements

Construction-specific guide

Payment Bonds

Protecting subs and suppliers

Getting Started

Government contracting basics