A performance bond is a financial guarantee, issued by a surety company, that the bonded contractor will complete the project according to the contract. If the contractor defaults (abandons the project, becomes insolvent, fails to perform), the surety steps in to either complete the work directly, find a replacement contractor, or pay the owner the cost of completion up to the bond amount. Federal public works over $150,000 require performance bonds under the Miller Act, alongside payment bonds. State and local public works have parallel requirements.
Performance bonds are typically written for 100% of contract value. The premium runs 0.5 to 3% of contract value depending on the contractor's bonding capacity. Bonding capacity itself is a function of the contractor's working capital, prior project history, and surety underwriting. Many small contractors cannot get bonded above a certain project size, which limits the public works they can pursue. Building bonding capacity is a long-term strategic priority for any contractor planning to scale into public or large commercial work.