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 over $150,000 requires performance and payment bonds under the Miller Act, every state mirrors this through Little Miller Acts (typically triggering at $50,000 to $200,000), and bid bonds typically run 5 to 10 percent of the bid amount. 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 bond claim on a $500,000 performance bond 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: 5 to 20 percent of the bid amount, sometimes a fixed cap (often 10 percent on federal jobs per FAR 28.101). Cost to you: usually free from your surety as part of the underwriting relationship if the bond program is established; some sureties charge a flat $100-$200 for one-off bid bonds.

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. A $1,000,000 contract performance bond at 1.5 percent costs $15,000 in premium, paid up-front for the bond term (usually contract duration plus 1 or 2 years of warranty).

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 when the contract value exceeds $150,000 (federal threshold reset 2024). 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 lower-threshold requirements; the threshold in Texas is $100,000, Florida $200,000, California $25,000 for state contracts, $5,000 for many local contracts.

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. A contractor with $200,000 working capital might get $2,000,000 of aggregate bonding, with a per-job cap around $400,000 to $750,000.

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

• SBA Surety Bond Guarantee Program (covers up to $9 million on federal contracts, up to $14 million on certain DoD jobs, with the SBA guaranteeing 80 to 90 percent of the surety's loss).
• 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).

References

• 40 U.S.C. Sections 3131-3134 (Miller Act, requiring performance and payment bonds on federal prime contracts over $150,000).
• 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 A311 (Payment Bond) - industry-standard surety bond forms.
• 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).