Contractors bidding on public or large private construction projects quickly learn that surety bonds are part of the process. Two of the most common bonds required in construction contracting are bid bonds and performance bonds. While they are closely related and often required together, they serve different purposes at different stages of a project.
For contractors who are new to bonded work—or who are expanding into larger public projects—understanding the distinction between these bonds is critical. Submitting the correct bond at the right stage of the bidding process can determine whether a contractor’s bid is accepted and whether they ultimately secure the project.
If you need help obtaining a bid bond or performance bond for an upcoming project, Surety Bond Authority works with contractors across the country to provide fast, reliable bonding solutions so you can focus on winning and completing projects.
In this article, we’ll explain the difference between bid bonds and performance bonds, how they work together, and why project owners require them.
Why Surety Bonds Exist in Construction Projects
Large construction projects—especially public works projects funded by taxpayer dollars—carry significant financial risk for project owners. Governments and private developers need assurance that the contractors they select are financially responsible and capable of completing the work.
Surety bonds help provide that protection.
Unlike insurance, which spreads risk across many policyholders, a surety bond involves three parties:
- The principal – the contractor who must obtain the bond
- The obligee – the project owner requiring the bond
- The surety – the bonding company that guarantees the contractor’s obligations
If the contractor fails to meet certain obligations defined in the bond, the surety steps in to compensate the project owner or arrange for the project to be completed.
Bid bonds and performance bonds represent two different stages of this protection.
What Is a Bid Bond?
A bid bond is submitted with a contractor’s bid proposal during the competitive bidding process. Its primary purpose is to guarantee that the contractor submitting the bid will honor their proposal if they are selected for the project.
When a contractor submits a bid bond, they are effectively promising that they will:
- Accept the contract if awarded the job
- Sign the contract at the price they bid
- Provide the required performance and payment bonds
If the contractor refuses to move forward after winning the bid, the project owner can file a claim against the bid bond.
What Happens if a Contractor Backs Out?
Consider a simple example.
A government agency solicits bids for a public construction project.
- Contractor A submits a bid of $1,000,000
- Contractor B submits a bid of $1,080,000
Contractor A wins the bid but later decides they cannot perform the work at that price and refuses the contract.
The project owner must now award the project to Contractor B for $1,080,000. The difference between the two bids is $80,000.
In this situation, the bid bond may cover the difference between the winning bid and the next lowest qualified bid, protecting the project owner from financial loss caused by the contractor backing out.
Typical Bid Bond Amounts
Bid bonds are usually issued for 5% to 10% of the total bid amount, although the exact requirement depends on the project specifications.
One interesting aspect of bid bonds is that many are issued at no cost to the contractor. The reason is simple: if the contractor wins the bid, they will typically purchase the required performance bond, which generates the premium for the surety company.
What Is a Performance Bond?
While the bid bond protects the project owner during the bidding phase, a performance bond protects them during the construction phase.
Once the contractor is awarded the project and signs the contract, the project owner will require a performance bond before construction begins.
The performance bond guarantees that the contractor will:
- Complete the project according to the contract specifications
- Meet the agreed-upon timeline
- Fulfill all contractual obligations
If the contractor defaults during construction—whether due to financial failure, poor workmanship, or inability to complete the project—the surety may step in to resolve the situation.
What Happens if a Contractor Defaults?
If a contractor fails to complete the project, the surety typically has several options available.
Depending on the circumstances, the surety may:
- Hire another contractor to complete the work
- Provide financial assistance to the original contractor so the project can continue
- Pay the project owner the cost required to complete the project
Because the performance bond guarantees completion of the project, it is typically issued for 100% of the contract value.
This ensures that sufficient funds are available to finish the project if the original contractor cannot.
Expert Insight: Understanding Bid Bonds and Performance Bonds helps contractors navigate project bidding and execution with confidence.
Bid Bonds vs. Performance Bonds: Key Differences
Although bid bonds and performance bonds are closely related, they serve distinct purposes.
The most important differences include when they are required and what they guarantee.
Bid Bond
- Submitted with the contractor’s bid proposal
- Guarantees the contractor will honor their bid
- Protects the project owner during the bidding process
- Usually issued for 5–10% of the bid amount
Performance Bond
- Required after the contractor is awarded the contract
- Guarantees the contractor will complete the project
- Protects the project owner during construction
- Usually issued for 100% of the contract value
In simple terms, the bid bond ensures the contractor will enter the contract, while the performance bond ensures the contractor will complete the contract.
How Bid Bonds and Performance Bonds Work Together
The bidding and bonding process in construction projects typically follows a clear sequence.
Step 1: Contractors Submit Bids
During the bidding phase, contractors submit proposals outlining how much they will charge to complete the project. Many project owners require each bid to include a bid bond.
This requirement discourages contractors from submitting unrealistic bids or backing out after being selected.
Step 2: Project Owner Awards the Contract
After reviewing all submitted bids, the project owner selects the lowest responsible bidder. At this stage, the contractor must sign the contract and provide the required performance and payment bonds.
Step 3: Construction Begins
Once the performance bond is issued and the contract is finalized, construction work can begin. The performance bond remains in place throughout the project to guarantee completion.
This sequence provides project owners with protection at every stage—from the bidding process through project completion.
Why Public Projects Require Both Bonds
Public construction projects frequently require both bid bonds and performance bonds because government agencies must safeguard taxpayer funds.
At the federal level, this requirement is governed by the Miller Act, which mandates performance and payment bonds for federal construction contracts exceeding $150,000.
Many states have adopted similar laws—often called “Little Miller Acts”—that apply to state and local projects.
These bonding requirements serve several important purposes:
- Ensuring that contractors submit serious, responsible bids
- Protecting project owners from financial losses if contractors default
- Encouraging financial stability among contractors working on public projects
Because of these protections, bonding requirements have become standard practice across much of the construction industry.
Common Contractor Misconceptions
Contractors who are new to bonded projects often misunderstand the role of bid bonds and performance bonds.
One common misconception is that a bid bond guarantees project completion. In reality, the bid bond only guarantees that the contractor will enter into the contract and provide the required performance bond.
Another misunderstanding is that contractors must purchase bid bonds and performance bonds separately.
In many cases, the bid bond is simply the first step in the bonding process. Once the contractor wins the project, the surety issues the performance bond and collects the premium at that time.
Some contractors also assume that bonding is only required for large government projects. While public works projects commonly require bonds, private developers increasingly use bonding requirements as well—particularly for large or complex construction projects.
How Contractors Qualify for Bid and Performance Bonds
Surety companies evaluate contractors carefully before issuing bonds. This process, known as surety underwriting, helps ensure that contractors are capable of completing the projects they bid on.
Some of the key factors sureties evaluate include:
Financial strength
Sureties review financial statements to confirm that the contractor has the resources to handle the project.
Credit history
Strong credit signals financial responsibility and reliability.
Experience
Sureties prefer contractors who have successfully completed similar projects.
Work program size
Sureties look at the contractor’s current workload to ensure they are not overextended.
Reputation and performance history
A strong track record of completing projects on time and within budget can improve bonding capacity.
Contractors who establish a good relationship with a surety provider often find it easier to obtain the bonds they need as their business grows.
Why Understanding the Difference Matters
For contractors, understanding the difference between bid bonds and performance bonds can help avoid costly mistakes during the bidding process.
Submitting the wrong bond—or failing to provide the required bond documentation—can cause a bid to be rejected outright. In competitive bidding situations, even minor errors can mean losing the project.
By understanding when each bond is required and what it guarantees, contractors can approach the bidding process with greater confidence.
Bonding also helps contractors demonstrate financial credibility to project owners, which can open the door to larger and more profitable projects.
Final Thoughts
Bid bonds and performance bonds are essential tools that help maintain trust and financial security in the construction industry. While the bid bond ensures that contractors stand behind their bids, the performance bond guarantees that projects will be completed according to contract terms.
Together, these bonds protect project owners while helping qualified contractors compete for valuable construction opportunities.
If you’re preparing to bid on a project and need help obtaining the right bond, Surety Bond Authority specializes in helping contractors secure bid bonds and performance bonds quickly and efficiently, allowing you to focus on winning bids and completing successful projects.
