A construction bond is a financial guarantee issued by a surety company on behalf of a contractor. The two most common types are performance bonds (guaranteeing project completion to the contract terms) and payment bonds (guaranteeing payment to subcontractors and suppliers).
Bonds are typically required on public works projects (mandatory under federal Miller Act and most state Little Miller Acts) and on larger commercial projects (often required by the owner or lender). The contractor pays a premium (typically 0.5% to 3% of contract value) to the surety, and the surety underwrites the contractor based on financial strength, experience, and bonding capacity. Bonding capacity scales with revenue, working capital, and prior bonded work, which is why smaller contractors often cannot bond projects above $1M to $5M without time spent building capacity.