Last Updated: April 20, 2026
If you’re bidding on a construction project or managing one, you’ve probably seen the terms “performance bond” and “payment bond” in the contract documents. They sound similar, they’re often required together, and they’re both surety bonds. So what’s the actual difference?
The short version: a performance bond protects the project owner, and a payment bond protects the people who do the work and supply the materials. They serve completely different purposes, and understanding the distinction matters whether you’re an owner, a contractor, or a subcontractor. If you already know which bond you need and want to get moving, call us at 800-333-7800 or request a free quote online. We’ve been writing construction bonds since 1971.
What Is a Performance Bond?
A performance bond guarantees that the contractor will complete the project according to the terms of the contract. If the contractor defaults, abandons the job, or delivers work that doesn’t meet specifications, the performance bond kicks in.
The project owner (called the obligee) is the one protected by a performance bond. If the contractor fails to perform, the surety company steps in to make sure the project gets finished. That might mean hiring a replacement contractor, funding the completion, or compensating the owner for the cost of getting the work done right.
Think of a performance bond as the owner’s insurance policy against a contractor who can’t or won’t finish the job.
What Is a Payment Bond?
A payment bond guarantees that the contractor will pay the subcontractors, laborers, and material suppliers working on the project. If the contractor collects payment from the owner but doesn’t pass it along to the people who actually did the work, the payment bond provides a way for them to recover what they’re owed.
The parties protected by a payment bond are the subcontractors, suppliers, and workers. Without a payment bond, these parties might have no practical way to collect, especially on public projects where mechanics lien rights typically don’t apply.
Think of a payment bond as the safety net for everyone working downstream of the general contractor.
Side-by-Side Comparison
Here’s how the two bonds stack up across the key areas:
- Who is protected? A performance bond protects the project owner. A payment bond protects subcontractors, suppliers, and laborers.
- What does it guarantee? A performance bond guarantees the contractor will complete the project per the contract. A payment bond guarantees the contractor will pay everyone who works on or supplies the project.
- What triggers a claim? On a performance bond, the trigger is contractor default, abandonment, or substandard work. On a payment bond, the trigger is the contractor failing to pay subs, suppliers, or workers.
- Who files the claim? The project owner files performance bond claims. Subcontractors, suppliers, and laborers file payment bond claims.
- Is it legally required? Both are required on federal projects over $100,000 under the Miller Act. Most states have similar requirements for state and local public projects.
The Miller Act: Why Both Bonds Are Required on Federal Projects
The Miller Act is a federal law that requires contractors on federal construction projects over $100,000 to provide both a performance bond and a payment bond. The performance bond protects the government’s investment. The payment bond protects the subcontractors and suppliers, since they cannot file mechanics liens against government property.
Nearly every state has its own version of the Miller Act (commonly called “Little Miller Acts”) that imposes similar requirements on state and municipal projects. The thresholds and specific rules vary by state, but the principle is the same: public construction projects require both bonds.
Private project owners are not legally required to demand these bonds, but many do. Lenders, in particular, often require both bonds before releasing construction financing. It’s a smart risk management move for any project of significant size.
When Do You Need a Performance Bond, a Payment Bond, or Both?
The answer depends on your role:
If you’re a project owner or developer: You want both. The performance bond protects you from a contractor who doesn’t finish. The payment bond protects you from mechanics liens and payment disputes among the contractor’s subs and suppliers. Even when bonds aren’t legally required, requiring both is considered best practice on any project large enough to have subcontractors involved.
If you’re a general contractor: You’ll need to provide both bonds if the project requires them. This is standard on public work and increasingly common on private projects. Being bondable is a competitive advantage. It signals to owners that your finances are solid and a surety company stands behind your work.
If you’re a subcontractor or supplier: You benefit from the general contractor’s payment bond. If the GC doesn’t pay you, the payment bond is your remedy. On public projects especially, where you can’t file a mechanics lien, the payment bond may be your only recourse.
How Performance and Payment Bonds Work Together
While they protect different parties, performance and payment bonds work as a pair. Together, they create a complete layer of financial protection for a construction project.
Consider what happens without them. If a contractor abandons a project, the owner is stuck paying to finish it. If the same contractor also stiffed the subcontractors, those subs have no way to collect. The project stalls, lawsuits pile up, and everyone loses.
With both bonds in place, the owner has a clear path to project completion through the performance bond, and the subcontractors have a clear path to payment through the payment bond. That’s why they’re almost always required together.
The two bonds are typically issued at the same time, by the same surety company, as part of the same underwriting process. The contractor applies for both, and the surety evaluates the contractor’s financial strength, experience, and track record before deciding to issue them.
How to Get a Performance Bond or Payment Bond
The process starts with a bond application. The surety company will evaluate the contractor’s financial statements, credit history, work experience, and current backlog. Contractors with strong financials and a solid track record can often get approved quickly. In many cases, we can issue bonds the same day.
The cost of the bonds (the premium) depends on several factors, including the size of the project, the contractor’s financial profile, and the type of work. Every situation is different, so the best way to get an accurate number is to call us at 800-333-7800 for a free, no-obligation quote.
One important note: surety bonds are not insurance. If the surety pays a claim on your bond, you (the contractor) are required to reimburse the surety. This is called indemnity, and it’s a fundamental difference between bonds and insurance policies.
Frequently Asked Questions
What is the main difference between a performance bond and a payment bond?
A performance bond guarantees the contractor will complete the project according to the contract. A payment bond guarantees the contractor will pay subcontractors, suppliers, and laborers. The performance bond protects the project owner, while the payment bond protects the workers and suppliers downstream.
Are performance and payment bonds required by law?
Yes, on federal construction projects over $100,000 under the Miller Act, and on most state and municipal projects under state-level “Little Miller Acts.” Private projects may also require them, depending on the contract and the lender’s requirements.
Can I get a performance bond without a payment bond?
It’s possible on private projects where the owner only requires one. However, on public projects, both are typically required by law. Even when only one is required, surety companies often recommend both because they complement each other.
How much does a performance bond or payment bond cost?
The premium depends on the contract amount, the contractor’s financial strength, credit history, and the type of project. Every situation is unique. Call Surety Bond Authority at 800-333-7800 for a free quote tailored to your specific project.
Who pays for performance and payment bonds?
The contractor pays the bond premium. However, most contractors factor the bond cost into their bid or contract price, so the owner ultimately bears the cost indirectly. This is standard practice in the construction industry.
What happens if a claim is filed on a performance bond?
The surety investigates the claim. If it’s valid, the surety works to complete the project, which may involve hiring a new contractor, funding the original contractor to finish, or compensating the owner. The contractor is required to reimburse the surety for any amounts paid.
What happens if a claim is filed on a payment bond?
The unpaid subcontractor or supplier files a claim with the surety. If the claim is valid, the surety pays the claimant and then seeks reimbursement from the contractor. There are typically strict time limits for filing payment bond claims, so acting quickly is important.
How do I get a performance bond or payment bond?
Contact a surety bond company like Surety Bond Authority. We’ll walk you through the application, review your financials, and work to get you approved as quickly as possible. Many contractors are approved the same day. Call 800-333-7800 to get started.
Ready to Get Bonded?
Whether you need a performance bond, a payment bond, or both, Surety Bond Authority has you covered. We’ve been writing construction bonds nationwide since 1971, and we know this business inside and out. Call us at 800-333-7800 or contact us online for a free quote. Same-day approvals are available for qualified contractors.
