Surety Bonds for Public-Works Projects - Bid, Performance, and Payment Bond Mechanics

Why this matters

Public-works contracts (federal, state, county, municipal, school district, airport, transit, public university) are one of the largest stable revenue streams in the trades, but the door to that market is bonded. Every federal prime contract above the Miller Act threshold requires performance and payment bonds (40 U.S.C. Sections 3131-3134; the dollar trigger is set in FAR 28.102 and has been adjusted more than once, so confirm the current figure there), every state mirrors this through its own Little Miller Act at a threshold it sets independently, and bid bonds typically run 5 to 10 percent of the bid amount on state and local work, with federal work set higher by regulation. A trade business that doesn't understand bond mechanics can't bid, can't get a prime contractor to sub-tier them on a federal job, and can't compete for the higher-margin public work where most private GCs won't go. Worse, a contractor who DOES get bonded but doesn't understand the indemnity agreement they signed is personally liable (and so is their spouse) for every dollar the surety pays out. A single claim on a performance bond written for a job the size of your annual revenue will end most small contractors. Knowing exactly what you're signing and how to manage bond capacity is the difference between scaling into public work safely and being one bad project away from bankruptcy.

The three bonds that govern public projects

Bid bond. Guarantees that if you're the low bidder, you'll sign the contract at your bid price and provide the required performance + payment bonds. If you don't (you forgot a major cost, your bid was wrong, you walked away), the surety pays the obligee (the public agency) the difference between your bid and the next-lowest responsive bidder. Typical bid bond penalty on state and local work: 5 to 10 percent of the bid amount, per that agency's own solicitation. Federal work is higher, not lower: FAR 28.101-2 sets the bid guarantee at 20 percent of the bid price, subject to a dollar ceiling stated in that same section. Pull the current ceiling from FAR 28.101-2 rather than assuming, and do not carry a 10 percent state-job habit onto a federal bid. Cost to you: usually free from your surety as part of the underwriting relationship if the bond program is established; some sureties charge a small flat fee for a one-off bid bond, an amount that rounds to nothing against the bid itself.

Performance bond. Guarantees you'll complete the contract per the plans and specifications. If you default, the surety has three options (and chooses based on what's cheapest for them):

1. Take over and complete the work themselves (typically by hiring a completion contractor).
2. Allow the obligee to complete and pay the obligee for the cost overrun up to the bond penal sum.
3. Tender a new contractor to the obligee.

Penal sum is typically 100 percent of the contract value. Cost to the contractor: typically 0.5 to 3.5 percent of contract value annually, depending on size, risk class, and contractor financial strength. Premium is a straight rate on contract value, so a job ten times bigger carries roughly ten times the premium. It is paid up-front for the bond term (usually contract duration plus 1 or 2 years of warranty), so carry it as a bid line item, not an afterthought that eats your margin after award.

Payment bond. Guarantees that subs and material suppliers will be paid. Required because subs and suppliers on public projects CANNOT file mechanics liens against government property. The payment bond is their substitute remedy. Penal sum is typically 100 percent of contract value. Bundled with the performance bond at no incremental cost on most jobs.

The Miller Act (40 U.S.C. Sections 3131-3134) governs federal prime contracts and requires performance + payment bonds once contract value exceeds the threshold implemented at FAR 28.102, which was $150,000 as of the 2024 FAR text and is subject to periodic statutory adjustment. Pull the current figure from FAR 28.102 rather than quoting this one. The federal Government may waive the requirement under certain circumstances but rarely does for trade work. All 50 states have a Little Miller Act with similar but generally lower thresholds, each set in that state's own statute (Texas Government Code Chapter 2253, Florida Statutes Section 255.05, California Civil Code Sections 9550-9566, and so on) and each amendable by that state's legislature. Look up the operative threshold in the statute for the state you are bidding in; a number carried over from a trade-school handout is the single most common way contractors bid a job unbonded that needed a bond.

How a surety underwrites you

Sureties are not insurance companies in the traditional sense. They don't expect to pay claims; they expect the contractor (and the contractor's personal guarantors) to be financially capable of completing every job. Loss ratios on construction surety are typically under 20 percent industry-wide because of how rigorously the contractor is pre-qualified. The "Three C's" framework drives every underwriting decision:

Character. Personal credit reports on every owner with 10 percent or more equity, references from prior obligees, references from major suppliers, history of any prior bond claims (a single claim within 10 years effectively ends most contractors' bond programs with prime sureties).

Capacity. Demonstrated ability to handle the work. Past completed projects of similar or larger size, current backlog, key personnel resumes, equipment and crew availability.

Capital. Working capital (current assets minus current liabilities, ignoring goodwill and intangibles); net worth; lines of credit; reviewed-or-audited financial statements (NOT compiled, NOT internal) prepared by an outside CPA on a percentage-of-completion or completed-contract basis depending on the surety's preference. The rule of thumb: a surety will write a single-job bond up to roughly 10 to 15 percent of net worth, and aggregate backlog (sum of remaining bonded contract value across all projects) up to 10 to 20 times working capital. Run those ratios against your own balance sheet. In practice a shop starting a bond program lands at the low end of the aggregate range, with a per-job cap between two and four times working capital. That is why building working capital, not chasing revenue, is what raises your bonding ceiling.

A new contractor with no track record can sometimes start through:

• SBA Surety Bond Guarantee Program (13 CFR Part 115). The program covered contracts up to $9 million, and up to $14 million on certain DoD jobs, as of the 2024 program terms, with the SBA guaranteeing 80 to 90 percent of the surety's loss. SBA adjusts these caps by rule, so confirm the current ceiling on the SBA program page before you build a bid around it.
• Functional contractor surety programs that target small/emerging contractors (Liberty Mutual, Travelers, Zurich North America, CNA all have programs).
• Collateral-backed bonds where the contractor pledges cash or a letter of credit equal to a percentage of the bond.

The indemnity agreement (the document that puts your house on the line)

Every surety requires a General Indemnity Agreement (GIA) signed by:

• The corporate entity (your LLC or corporation).
• Every owner with 10 percent or more equity AND their spouse, individually.
• Often any related entities (other LLCs you own).

The signature block is not the part that hurts. These are the clauses that do, and they are close to universal across sureties:

Reimbursement is joint and several, and it is not capped at the bond penal sum. You owe the surety every dollar it pays out plus its investigation costs, consultant fees, and attorney fees. Each indemnitor owes the whole amount, so the surety can collect all of it from whichever signer has assets and let the signers sort it out among themselves.

Collateral on demand, before anything is proven. Most GIAs let the surety demand cash collateral in the amount of its reserve as soon as a claim is asserted, whether or not you are actually liable and whether or not the surety has paid anything yet. Refusing the demand is itself a breach. This is the clause that surprises contractors: the money leaves before the dispute is decided.

The surety decides whether to settle, and the settlement binds you. The agreement typically makes the surety's vouchers and payment records prima facie evidence of your liability. You do not get to insist it fight a claim you believe is bogus.

Assignment of everything the job touches. On default the surety takes your rights in the contract, the contract balance and retainage, receivables, materials on site, and often plant and equipment.

Books and records access. The surety can examine your financials at will, not just at renewal.

It survives, and it is not job-specific. One GIA typically covers every bond the surety writes for you, past and future. It does not expire when the project closes out. Removing an indemnitor (a departing partner, an ex-spouse) requires the surety's written release, and the surety has no obligation to give one.

The spousal signature is what reaches jointly held marital assets, including the house. That is the plain reason the surety asks for it, and it is worth saying out loud to the person being asked to sign. Have a construction attorney read the GIA before anyone signs, and negotiate what can be negotiated (collateral demand triggers, a defined release process, carving out unrelated entities) while you still have the leverage of an unsigned agreement.

References

• 40 U.S.C. Sections 3131-3134 (Miller Act, requiring performance and payment bonds on federal prime contracts above the threshold implemented at FAR 28.102).
• Federal Acquisition Regulation (FAR) Part 28 (Bonds and Insurance), Subparts 28.1 (Bonds) and 28.2 (Sureties and Other Security).
• State Little Miller Acts: Texas Government Code Chapter 2253; California Civil Code Section 9550-9566; Florida Statutes Section 255.05; New York State Finance Law Section 137; Illinois 30 ILCS 550.
• 13 CFR Part 115 (Small Business Administration Surety Bond Guarantee Program).
• AIA Document A312-2010, Performance Bond and Payment Bond - one document containing both forms, the industry-standard pair. It superseded A311, which is retired; do not ask for A311 as though it were the payment bond half of A312.
• Surety Information Office (SIO) and National Association of Surety Bond Producers (NASBP) - bond agent locator and educational resources.
• Federal District Court rules of civil procedure for Miller Act claim litigation (Federal Rules of Civil Procedure, with Miller Act venue specifically in the federal district where the contract was performed).