What is a bid bond, and how do performance bonds work?

A bond is not insurance. Insurance protects you; a surety bond protects the agency, and if the surety has to pay out, it comes after you for the money. Understanding that one sentence explains most of how bonding works and why underwriters ask what they ask.

There are three parties: you (the principal), the surety that issues the bond, and the agency (the obligee). The bond is a written promise that if you do not do what you said, the surety covers the agency's loss.

A bid bond answers one question

"If we award this to you, will you actually sign?"

Agencies run a procurement that costs them real time. A bidder who wins and then walks away - because the number was wrong, or a better job came up - pushes them back to the second bidder at a higher price. The bid bond makes that walk-away expensive for you rather than for them.

On federal work the size is specific: a bid guarantee is at least 20 percent of the bid price, capped at $3 million. It is not the whole contract value, and that surprises people who assume bonding a $2m job means finding $2m.

A federal contracting officer cannot require a bid guarantee unless a performance or payment bond is also required - the bid bond does not travel alone. And on construction contracts, only a separate bid guarantee is acceptable.

Performance and payment bonds are the bigger ask

These come after award, and on federal construction they are governed by the Miller Act:

• Over $150,000 - both a performance bond and a payment bond, each at 100 percent of the original contract price, rising with any price increases. The payment bond cannot be smaller than the performance bond.
• $35,000 to $150,000 - payment protection at 100 percent of the contract price, though the contracting officer can document a determination that this is impractical.
• Non-construction work - bonds may be required above the simplified acquisition threshold where the government's interest needs protecting, but they are not the norm.

The performance bond is what makes bonding a question of capacity, not just cost. A surety writing 100 percent of a $4m contract is underwriting your ability to finish a $4m job. It will look at your balance sheet, your working capital, your completed work, and your backlog - and a company with the skills but not the balance sheet gets declined for reasons that have nothing to do with quality of work.

Between $35,000 and $150,000 you have alternatives

For federal construction in that band, a surety bond is not the only acceptable payment protection. The alternatives are:

• an irrevocable letter of credit
• a tripartite escrow agreement
• a certificate of deposit
• a security deposit, in cash or other specified forms

If your bank relationship is stronger than your surety relationship, this band is worth knowing about.

If you cannot get bonded yet

The SBA guarantees bid, performance, payment and maintenance bonds issued by participating surety companies, which is how a lot of smaller contractors get their first bond. The headline terms:

• contracts and subcontracts up to $9 million
• up to $14 million on federal contracts, where a federal contracting officer certifies that the SBA guarantee is necessary for the small business to obtain bonding
• a fee of 0.6 percent of the contract price for performance and payment bond guarantees

The practical move is to build a relationship with a surety agent before you need one. Underwriting is not a same-week process, and the first bond is always the slowest.

The numbers above are federal. Yours may not be.

This matters and it is the easiest thing to get wrong. The 20 percent, the $3 million cap and the $150,000 Miller Act threshold are federal rules. States, cities, authorities and school districts set their own thresholds and percentages, and many have their own "Little Miller Act" with different numbers.

A New York City agency, a Texas school district and a federal agency can all want a bond on similar work and all want it differently. The solicitation is the authority - read what that specific agency is asking for, and do not assume the federal numbers carry across.

Check this against the primary sources

• FAR Subpart 28.1 - Bonds and Other Financial Protections - the thresholds and percentages above
• FAR Part 28 - Bonds and Insurance
• SBA - Surety Bond Guarantee Program
• SBA - Surety bond basics

BusyBids is not a surety, a broker or an adviser. We track what agencies publish. Bonding requirements come from the solicitation and from the surety you work with.

See current opportunities

Bonding requirements are set per solicitation, so the useful thing is to read a few real ones: all current bids, or by trade - general contracting, HVAC, electrical, paving.