A performance bond is a surety contract that guarantees a contractor will complete a project according to the terms and conditions of a construction contract. The bond is issued by a surety company that vouches for the contractor (the principal) to the project owner (the obligee). If the contractor fails to perform, the surety must either ensure completion—commonly by paying a substitute contractor—or pay damages up to the bond amount.

Performance bonds are distinct from payment bonds, which guarantee that subcontractors and suppliers will be paid, and from bid bonds, which back a bidder’s promise to honor a bid and enter into a contract. All three are common in public and large private construction projects as part of comprehensive contracting risk controls.

California’s construction market is one of the nation’s largest: recent estimates place annual construction spending in the state in the hundreds of billions of dollars across residential, commercial, and public infrastructure sectors. With projects of such scale, performance bonds protect public funds and private investment by providing a financially enforceable guarantee of completion.

For public projects in particular, bonds protect taxpayers and public agencies. They also protect subcontractors and suppliers indirectly: when a project is properly completed, the risk of nonpayment or abandonment diminishes. Lenders and equity investors often require bonds as a condition of financing, because bonded projects reduce the chance of loss from contractor default.

Common Situations Requiring Performance Bonds

Typical scenarios where performance bonds are used in California include public works contracts (municipal, county, state), school district construction, highway and bridge projects, large private developments, and construction loans where the lender requires a bond as a condition of funding.

The legal requirements around performance bonds depend on whether the project is a public work or a private construction contract. California has specific statutes that govern bonding for public works, while private project requirements are usually contractual and determined by the owner, lender, or other stakeholders.

Public Works Contracts

California law commonly requires performance and payment bonds on public works contracts above certain thresholds. Historically, the threshold for public works has been relatively low—one often-cited figure is $25,000—but statutory thresholds and procedures can change over time. When a bond is required, it is usually for 100% of the contract amount.

For federally funded projects, the Miller Act requires performance and payment bonds for federal contracts above the federal threshold (previously $100,000; that amount has been adjusted periodically). On federally funded projects located in California, contractors must comply with both federal and state bonding rules where applicable.

Private Projects and Contractual Bonds



On private projects, bonding is typically a matter of negotiation. Owners, developers, lenders, and joint venture partners may insist on performance and payment bonds as part of the contract to mitigate completion risk. The bond amount, terms, and claims procedures are set by the parties and reflected in the construction contract and the bond form.

Several bond forms are used in construction. Understanding the differences helps parties select the right protections and ensures compliance with legal and contractual obligations.

Performance Bonds

Performance bonds guarantee contractual completion. If a contractor defaults, the surety may finance completion, hire a new contractor, or pay damages up to the bond limit. The bond typically covers defects in workmanship and failure to perform to contract requirements.

Payment Bonds

Payment bonds guarantee that subcontractors and material suppliers will be paid. On public projects where payment bonds are required, they prevent mechanics’ liens against public property, since most public property cannot be liened. These bonds usually protect lower-tier subcontractors and suppliers for amounts owed under the contract.

Bid Bonds

Bid bonds protect the owner if an accepted bidder refuses to enter into a contract or provide required performance/payment bonds. Bid bonds typically guarantee a percentage of the bid amount, often 5-10%, as compensation if the bidder defaults in the procurement phase.

Maintenance Bonds and Warranty Bonds

Some owners require maintenance or warranty bonds after project completion to ensure defects are repaired during a warranty period. These bonds are generally for a limited duration and a smaller percentage of the contract price, commonly 5-10% for 12 to 24 months, although terms vary widely.

Pricing depends on the contractor’s credit, experience, the size and complexity of the project, and the surety’s underwriting criteria. A qualified, well-established contractor with good financials can secure a performance bond for a small percentage of the contract value. Typical premiums for low-risk, well-qualified principals range from about 0.5% to 3% annually of the bond amount for large public works when the surety does not require collateral.

For riskier accounts—new contractors, weak financials, or projects with complex work—premiums can be significantly higher, sometimes 3% to 10% or more. In those cases, sureties may require collateral (cash or letters of credit) or co-signers to mitigate exposure.

Underwriting Factors That Drive Cost

Common underwriting factors include the contractor’s financial statements, backlog and bonding capacity, claims and loss history, experience in the specific type of work, references, equipment ownership, and payment history with suppliers and subcontractors. Sureties also evaluate project-specific factors such as project scope, location, schedule, owner reputation, and contract terms.

Securing a performance bond involves preparation and collaboration with a surety or broker. The process is similar to securing a loan: a thorough underwriting review is performed, and financial strength and track record matter.

Application and Documentation

The surety will require an application along with supporting documents. Typical documentation includes recent financial statements (audited preferred), tax returns, bank references, a work program or backlog summary, a list of current jobs and key personnel, and a copy of the contract to be bonded. Timely and accurate documentation speeds up the process.

Credit and Financial Review

Surety underwriters analyze liquidity, net worth, working capital, and debt-to-equity ratios to determine risk. A contractor’s bonding capacity is often expressed as a multiple of net working capital; better financial metrics typically translate into higher capacity and lower premiums. Personal guarantees from principal owners are common for small or newer contractors.

Collateral and Indemnity Agreements

Many sureties require an indemnity agreement signed by the company’s principals. For marginal credits, collateral such as cash deposits or letters of credit can be required. Collateral reduces the surety’s exposure but ties up capital that could otherwise be used for operations or growth.

When a project owner believes a contractor has defaulted, the bond becomes the mechanism to resolve the default. The exact process depends on the bond language and applicable law, but certain practical steps and timelines are common.

Defining Default

Default is typically defined in the contract and often includes nonperformance, abandonment, substantial delays, failure to pay subcontractors or suppliers, or failure to correct defective work. Some bonds require the owner to declare the contractor in default in writing, giving notice and the opportunity to cure before the surety must act.

Surety’s Options After Default

Upon valid claims and proof of default, a surety generally has three options: (1) arrange for the contractor to perform, (2) finance the contractor to continue performance, or (3) engage a new contractor to complete the work, up to the penal sum of the bond. In many cases, the surety will arrange for completion by hiring a successor contractor and overseeing performance to limit additional exposure.

Claims by Subcontractors and Suppliers

Subcontractors and suppliers who are unpaid but protected by a payment bond must follow statutory notice and claim procedures. Those procedures often require timely payment notices, claims within specified periods after last furnishing labor or materials, and other documentation to establish the amount due. Missing procedural requirements can jeopardize a claim, so careful compliance is essential.

Disputes arise over whether a default occurred, the sufficiency of notice, the amount owed, and defects versus changes in scope. Real-world examples help illustrate how disputes typically unfold.

Example: School District Renovation

When a general contractor working on a school modernization falls behind schedule and subcontractors claim nonpayment, the district may declare default and call the performance bond. The surety investigates, potentially negotiating partial payments to subcontractors while arranging a completion contractor for remaining work. Proper documentation—contracts, change orders, daily reports—becomes central to resolving claims and allocating responsibility.

Example: Highway Project with Design Changes



A contractor on a Caltrans project faces numerous owner-ordered changes. Disputes about change order pricing escalate, and the contractor suspends work. If default is declared, the surety evaluates whether the issues stem from nonpayment for approved changes, contractor mismanagement, or inability to perform. The surety’s decision to step in will reflect liability exposure and the costs of completion versus settlement.

Subcontractors and suppliers often rely on payment bonds for protection when working on bonded public projects. Understanding the notice and filing requirements is critical to preserving rights.

Notice Requirements and Deadlines

State statutes and bond language typically impose strict and short deadlines for providing preliminary notices and filing claims. For example, a supplier who furnishes materials might need to provide written notice to the prime contractor and the public entity within a prescribed timeframe to preserve a payment bond claim. It is essential to consult contract documents and applicable statutes immediately when nonpayment occurs.

Documentation That Strengthens a Claim

Accurate invoices, delivery tickets, lien waivers, copies of the notice to the contractor, signed contracts, change order authorizations, and correspondence all strengthen a bond claim. Without clear documentation, a surety may dispute amounts or reject the claim on procedural grounds.

Contract provisions shape bonding obligations and remedies. Owners and contractors should draft bond-related clauses carefully to avoid unintended consequences or loopholes that complicate claims.

Careful Drafting of Bond Requirements

Contract documents should specify whether performance and payment bonds are required, the exact penal sum (often 100% of the contract price for public work), acceptable surety companies (licensed and listed on the U.S. Department of Treasury’s list of approved sureties for federal work), and procedures for declaring defaults and making claims. Ambiguity in bond clauses often leads to disputes and litigation.

Indemnities and Waivers

Indemnity clauses between contractors and subcontractors, as well as lien waivers and conditional releases tied to payments, influence recovery avenues when problems arise. Owners should consider whether conditional waivers are acceptable, and subcontractors should avoid unconditional waivers until payment is confirmed.

Performance bonds are not the only way to manage completion risk. Depending on the project and parties’ preferences, various alternatives or complementary mechanisms may be used.

Letters of Credit and Escrows

Letters of credit and escrow accounts can substitute or supplement bonds in some private deals. These tools provide liquidity to cover costs if a contractor defaults but may lack the surety industry’s operational experience in arranging completion work.

Owner-Furnished Labor and Materials

Some owners reduce bonding costs by providing critical materials or resources directly, but that shifts coordination and schedule risk back to the owner. In many public contracts, that approach is impractical or prohibited.

Performance Insurance and Guarantees

Performance insurance products and guarantees may offer alternative risk transfer. However, these products vary in availability, cost, and the insurer’s willingness to fund completion. Evaluating claims-handling practices, financial strength, and exclusions is vital before relying on non-surety alternatives.

Proactive planning reduces the chance that bonding will become an obstacle to project success. Simple steps during project planning and prequalification can prevent costly disputes later.

Prequalification and Capacity Planning

Owners should prequalify contractors for bonding capacity and experience in similar work. A contractor’s financial and operational capabilities should be validated early to avoid surprises during procurement or execution. Contractors should confirm their available bonding capacity before bidding and maintain clear, accurate financials to speed surety approval.

Maintain Transparent Communication



Open, documented communication between owners, contractors, and sureties helps resolve issues before default declarations. Early notice of schedule delays, cost overruns, or payment disputes allows for negotiated solutions that preserve relationships and reduce reliance on the bond.

Due to variations in laws, contract language, and project specifics, professional advice is often warranted. Attorneys experienced in construction law, surety brokers, and commercial sureties provide expertise in navigating complex bond issues. Construction trade associations and state agencies also provide guidance and forms commonly used in California contracting.

Useful Contacts and Resources

Key resources include the Contractors State License Board for licensing and contractor bond requirements, California public contracting offices for procurement rules, and the U.S. Department of the Treasury for federally approved sureties. Construction law practitioners and experienced surety brokers can provide tailored advice for specific projects.

A quick checklist helps ensure bonding and related obligations are addressed before work starts:

- Confirm whether the contract requires performance, payment, or bid bonds, and the exact penal amounts and acceptable surety names.

- Obtain a copy of the project’s contract documents and bond forms for surety review before bidding.

- Verify bonding capacity with a broker or surety and review current financials and backlog to anticipate underwriting questions.

- Understand notice and claim deadlines that apply to subcontractors and suppliers on the project.

- Negotiate contract language around default, change orders, and dispute resolution to reduce ambiguity and litigation risk.

Performance bonds are a critical part of the risk-management landscape in California construction. They protect owners, taxpayers, and downstream parties when contractors fail to perform, but they also impose underwriting scrutiny and costs that contractors must plan for. Public projects often trigger statutory bonding requirements, while private projects depend on contractual agreement or lender conditions.

Careful prequalification, precise contract drafting, and early communication are the most effective tools for avoiding bond disputes. When problems arise, following notice and claim procedures and involving experienced surety counsel or brokers will increase the chances of an orderly resolution. For any specific project, consulting a construction attorney or surety professional ensures compliance with current California rules and helps tailor a bonding strategy to the project’s risks.