Understanding when each bond is used, what it does, and what may be required after a contract award
Contractors pursuing public and private construction work may encounter several different surety bond requirements. Two of the most common are bid bonds and performance bonds.
Although they are related, they serve different purposes and apply at different stages of a project.
A bid bond is generally connected to the bidding and award process. A performance bond is generally associated with the post-award stage and secures the contractor’s performance of its obligations under the bonded contract. Depending on the project requirements, the performance bond may need to be furnished before work can begin.
Understanding the difference before submitting a bid can help contractors prepare for the bonding process and avoid surprises after an award.
What Is a Surety Bond?
A surety bond generally involves three parties:
- The principal: The contractor or other party whose obligation is being bonded
- The obligee: The project owner or other party requiring the bond
- The surety: The company providing the bond
A surety bond provides assurance to the obligee that the principal will fulfill specified obligations under the bond.
In construction, different types of surety bonds may be required depending on the project, contract, and stage of the work.
What Is a Bid Bond?
A bid bond is associated with the bidding stage of a project.
For federal contracting, a bid bond can be used as a form of bid guarantee. The Federal Acquisition Regulation, or FAR, defines a bid guarantee as security assuring that the bidder will not withdraw its bid during the specified acceptance period and, if required after an award, will execute the contract and furnish the required bonds within the specified time.
For contractors, the concept can be understood more simply:
A bid bond supports the contractor’s commitment to stand behind its bid and provide the required final bonds if it is awarded the project.
A bid bond provides the project owner with additional assurance that the successful bidder will follow through with the steps required to enter the contract and furnish any required final bonds.
This is one reason contractors should review bonding requirements before submitting a bid, rather than waiting until after an award.
What Is a Performance Bond?
A performance bond relates to the contractor’s obligations under an awarded contract.
The FAR provides for performance bonds to secure the contractor’s performance and fulfillment of its obligations under the contract. The U.S. Small Business Administration similarly describes a performance bond as ensuring completion of a contract by the small business.
In practical terms:
The bid bond is connected to the bidding and award process. The performance bond is connected to performing the bonded contract after an award.
The exact obligations covered by a performance bond depend on the bond form and the underlying contract. Contractors should review the actual documents required for each project.
Bid Bond vs. Performance Bond
Here is a simple comparison:
| Bid Bond | Performance Bond | |
| When it is typically used | During the bidding process | After contract award |
| What it relates to | The contractor’s bid and obligations following an award | The contractor’s performance of the bonded contract |
| Who generally requires it | Project owner or obligee | Project owner or obligee |
| Contractor’s stage | Competing for the project | Preparing to perform or performing the project |
| What may come next | Performance and payment bonds if the contractor receives the award | Performance of the bonded contractual obligations |
The two are often directly connected.
For federal acquisitions governed by the FAR, a contracting officer generally does not require a bid guarantee unless a performance bond, or performance and payment bonds, will also be required.
A common sequence may look like this:
Project requires bonding → Contractor submits bid and required bid security → Contractor receives award → Required contract documents and final bonds are furnished → Work begins
Specific procedures and requirements can vary by project.
Have a Bonded Project Coming Up?
If an upcoming project requires a bid bond, performance bond, or another surety bond, starting the conversation before the deadline can provide more time to understand what information may be needed.
Call (561) 206-4733, email service@ramriskgroup.com, or use the RAM Risk Group contact form to discuss your bonding needs.
What About Payment Bonds?
Contractors will also frequently see payment bonds mentioned alongside performance bonds.
A payment bond addresses a different obligation.
The U.S. Small Business Administration describes a payment bond as ensuring payment to suppliers and subcontractors.
The basic distinction is:
- Bid bond: Relates to the bidding and award process
- Performance bond: Relates to performance of the bonded contract
- Payment bond: Relates to payment obligations to covered suppliers and subcontractors
Performance and payment bonds are commonly required together on certain construction projects.
How Much Bonding May Be Required?
There is no single percentage that contractors should assume applies to every project.
Bond requirements can depend on the project owner, contract, jurisdiction, type of work, applicable law, and the language of the solicitation.
Federal construction contracting provides one useful example.
Under the current FAR, when a federal bid guarantee is required, the amount must generally be at least 20% of the bid price, but cannot exceed $3 million.
For federal construction contracts exceeding $150,000 where a performance bond is required, the performance bond generally equals 100% of the original contract price, unless the contracting officer determines that a lesser amount is adequate to protect the government.
These are federal procurement requirements and should not be treated as universal rules for state, local, or private projects.
Contractors should always review the actual solicitation, contract, and bond forms for the project they are pursuing.
Why Bonding Should Be Considered Before Bid Day
Contractors should not treat the bond requirement as something to address only when the bid is already due.
The bid deadline may be only the first step. If the contractor receives the award, additional bonds may need to be furnished within the timeframe established by the solicitation or contract.
Surety underwriting can also involve more than simply completing a bond form.
Depending on the contractor, project, and surety, underwriting may consider the contractor’s financial condition, experience, capacity to perform the work, current workload, and other relevant information.
In the SBA Surety Bond Guarantee program, for example, businesses must meet the surety company’s credit, capacity, and character requirements.
Contractors may also be asked to provide financial and project information during the underwriting process.
Preparing requested information ahead of time can help reduce last-minute delays before a bid or contract deadline.
What Contractors Should Review Before Submitting a Bonded Bid
Before submitting a bid for a project that requires bonding, contractors should consider confirming:
- What type of bid bond or bid security is required?
- What amount or percentage is required?
- When must the bid bond be submitted?
- What performance and payment bonds will be required if the project is awarded?
- How soon after the award must those bonds be provided?
- Are specific bond forms included in the solicitation?
- Has your surety professional been given enough time to review the project?
- Are current financial statements and project information available if requested?
- Do you understand the size, scope, schedule, and contractual requirements of the project?
Starting the bonding conversation before the deadline can provide more time to identify requirements and address questions before the bid is due.
What Happens After You Receive the Award?
Receiving an award on a bonded project is an important milestone, but it may also trigger the next stage of the bonding process.
Depending on the project requirements, the successful contractor may need to complete required contract documents and furnish performance and payment bonds within a specified period and before work begins.
That is why bid bonds and performance bonds should not be viewed as unrelated documents.
The bid bond is part of the contractor’s path through the bidding and award process. The performance bond supports the contractor’s obligations under the bonded contract.
Understanding that sequence can help contractors plan for bonded work rather than reacting to each requirement as it appears.
Frequently Asked Questions About Bid and Performance Bonds
Is a bid bond the same as a performance bond?
No. A bid bond generally applies during the bidding process, while a performance bond relates to the contractor’s performance of the bonded contract after an award.
Do I automatically get a performance bond if I have a bid bond?
Not automatically.
A bid bond supports the bidder’s obligation to furnish required final bonds if the contract is awarded, but the performance bond is a separate bond issued for the awarded contract.
Final issuance may involve review of the contract, project information, and other underwriting requirements.
When should I contact my surety professional about a project?
Ideally, before the bid deadline.
Starting early provides more time to review the bond requirements, project size, contract terms, and information that may be needed during underwriting.
Are performance bonds always 100% of the contract amount?
Not in every situation.
Federal construction contracts exceeding $150,000 provide one example where performance bonds are generally set at 100% of the original contract price unless a lesser amount is determined adequate.
State, local, and private project requirements may differ.
Contractors should review the requirements of the specific project rather than assuming one percentage applies to every bond.
What is the difference between a performance bond and a payment bond?
A performance bond relates to the contractor’s performance of the bonded contract.
A payment bond generally relates to payment obligations to covered subcontractors and suppliers.
Can RAM Risk Group help before I submit a bonded bid?
RAM Risk Group works with contractors on surety bonding and can help contractors understand the bonding information required for an upcoming project, coordinate the bonding process, and work with surety markets as contractors pursue new opportunities.
Preparing for Your Next Bonded Project
Surety bonding can be an important part of pursuing construction opportunities, particularly public work and other projects where bonds are required.
For contractors, the best time to understand the bonding requirements is before the bid deadline.
RAM Risk Group works with contractors on surety bonding and can help you understand the bonding information required for an upcoming project, coordinate the bonding process, and work with surety markets as you pursue new opportunities.
Preparing to bid on a bonded project?
Call (561) 206-4733 or email service@ramriskgroup.com to speak with the RAM Risk Group team.
You can also submit your information through our online contact form, and a member of our team can follow up with you.
This article is provided for general informational purposes only and is not legal, financial, or underwriting advice. Surety bond requirements vary by project, contract, jurisdiction, obligee, and surety. Contractors should review the applicable solicitation, contract, and bond forms and consult appropriate legal, financial, and surety professionals regarding their specific circumstances.