A bid, performance or payment bond is a surety’s written promise to a project owner that you will sign the contract you bid, finish it on its terms, and pay the people who supply the job. It protects the owner, your suppliers and your subs rather than you, and the surety expects you to repay anything it pays out.
Principal, obligee and surety: who a bond serves
Every contract bond has three parties, and you are the one being guaranteed, not protected. The Federal Acquisition Regulation’s bond definitions call you the principal, the company backing your promise the surety, and the owner the obligee, then state the consequence: “If the principal’s obligations are not met, the bond assures payment, to the extent stipulated, of any loss sustained by the obligee.”
That runs the opposite way from your insurance. A general liability policy pays covered claims made against you and absorbs the loss. A bond pays the owner when you fall short, up to the bond’s penal sum, which the same definitions describe “as the maximum payment for which the surety is obligated”.
A surety is an insurance company, and you usually buy bonds through the same agent who places your policies. SBA’s surety bond guarantee regulations define the charge in plain terms: “Premium means the amount charged by a Surety to issue bonds.” What the premium buys is closer to credit than coverage: the surety lends its name to your promise and expects any loss to come back to you.
The structure holds when you work under someone else, too. SBA’s rules note that “A Principal may be a prime contractor or a subcontractor.” A general contractor that asks your paving or striping crew for a subcontract bond is the obligee on that bond.
The indemnity agreement you sign before the first bond
Before a surety writes anything, it asks your company, and usually its owners personally, to sign an indemnity agreement. That document is why a bond is not an insurance policy for you.
In the program SBA runs, its surety bond guarantee regulations require the surety to protect itself by “obtaining from each Principal a written indemnity agreement”, and they add that “The indemnity agreement must be secured by such collateral as the Surety or SBA finds appropriate.” They reach past the company too: “Indemnity agreements from other Persons, secured or unsecured, may also be required by the Surety or SBA.” Those are SBA’s rules for bonds it guarantees, not for every surety, but the pattern is common: the company signs, the owners often sign personally, and some sureties take collateral.
After a loss, the same rules point the surety back at the people who signed, expecting “salvage and recovery from a defaulted Principal, its guarantors and indemnitors”.
This is not the indemnity clause in your construction contract. That clause is your promise to the owner or general contractor about injury and damage claims, and whether your policy picks it up turns on insured contract wording. The surety’s agreement is your promise to repay the surety, and no policy you carry answers it. When two companies bid together, the name on the bond should match the name on the bid, the contract and the policy, which is part of bidding a paving job as a joint venture.
The bid bond: holding your price until award
A bid bond promises the owner that if you are the low bidder, you will sign the contract and deliver the bonds it calls for. SBA’s regulations put it in one sentence: “Bid Bond means a bond conditioned upon the bidder on a Contract entering into the Contract, and furnishing the required Payment and Performance Bonds.”
If you walk away, the owner’s loss is generally the extra cost of awarding the job to the next bidder, and SBA’s rules measure a bid bond loss by that comparison.
Handling matters on bid day. On federal work, the FAR says “In sealed bidding, noncompliance with a solicitation requirement for a bid guarantee requires rejection of the bid”. It also requires that “Any person signing a bid bond as an attorney-in-fact shall include with the bid bond evidence of authority to bind the surety”. The power of attorney travels with the bond, and a missing page can lose you the job. Confirm your mix, trucking and milling prices before the bid goes in, because withdrawing a low bid can become a claim.
The performance bond: finishing the work you contracted
A performance bond guarantees the owner that the contract gets done on its own terms. The FAR says “A performance bond secures performance and fulfillment of the contractor’s obligations under the contract.”
If you default, SBA’s regulations describe a surety as a party that “agrees to pay a sum of money or to incur the cost of fulfilling the terms of a Contract if the Principal breaches the conditions of the Contract”. That can mean financing you to finish, bringing in another contractor to complete a half-milled overlay, or paying the owner. The surety need not wait for a formal default: SBA’s rules define an imminent breach as “a threat to the successful completion of a bonded Contract which, unless remedied by the Surety, makes a default under the bond appear to be inevitable.”
The bond reaches correction or warranty work only as far as the contract requires it, and it is not liability insurance. A driver who hits your paver in a lane closure, or a customer who trips on a lot you just sealed, is a claim for your general liability or auto policy. An owner’s own protection on a road job comes from additional insured status or a separate owners and contractors protective policy, never from the performance bond.
The payment bond: the plant, the trucker and the striping sub
A payment bond protects the people who supply your job. The FAR says “A payment bond assures payments as required by law to all persons supplying labor or material in the prosecution of the work provided for in the contract.”
As the prime, your payment bond answers to the asphalt plant, the trucking firm and the striping sub if you do not pay them, and the surety then looks to you for repayment. As a sub or supplier to a bonded prime, the same kind of bond may be your remedy. On federal work, the statute lets a party one tier further down sue: “A person having a direct contractual relationship with a subcontractor but no contractual relationship, express or implied, with the contractor furnishing the payment bond may bring a civil action on the payment bond”.
The statute also provides that “A waiver of the right to bring a civil action on a payment bond required under this subchapter is void unless the waiver is—” and then lists conditions: the waiver must be in writing, signed, and given after the labor or material was furnished. It also sets notice and filing deadlines that a claimant can lose by missing. These are legal questions: your contract, the statute that governs the job and the bond’s own wording decide them, and nothing here is legal advice; take a specific claim to a construction attorney.
Real-World Scenario: A paving contractor wins a municipal mill-and-overlay, then loses its milling machine to a breakdown in the middle of the season and falls behind. Cash tightens, and the asphalt plant goes unpaid. The plant files on the payment bond, and the surety pays it. Soon after, the contractor and both owners, who signed the indemnity agreement personally, receive the surety’s demand to repay what it paid.
Bonding capacity: what the surety reads before it says yes
Bonding capacity is how much bonded work a surety will stand behind for you, on one job and in total, and it is underwritten on your company rather than a loss history. For sureties in its program, SBA’s regulations say “Sureties must evaluate the credit, capacity, and character of a Principal using standards generally accepted by the surety industry”, and SBA’s program page lists the same test for applicants: “Meet the surety company’s credit, capacity, and character requirements.”
The same rules add that “The Surety must reasonably expect that the Principal will successfully perform the Contract to be bonded.” Once the bond is written, it “must monitor the Principal’s progress on bonded Contracts”.
Sureties commonly ask for accountant-prepared financial statements, a work-in-progress schedule, your backlog, your bank relationship, an equipment list and a record of similar jobs. Paving is seasonal, and capacity is read against backlog, so a heavy spring bid list can reach your limit before summer does. Build the relationship in the off-season; our Ohio page shows when a bond enters one department’s contracts.
Federal work: the Miller Act, the FAR and Treasury-listed sureties
On federal construction, bonds come from a statute the FAR introduces as “Bonds (formerly known as the Miller Act)”. Above a contract size set by law, the statute requires two bonds “which become binding when the contract is awarded”: “A performance bond with a surety satisfactory to the officer awarding the contract, and in an amount the officer considers adequate, for the protection of the Government”, and “A payment bond with a surety satisfactory to the officer for the protection of all persons supplying labor and material”.
The two bonds are linked: “The amount of the payment bond shall not be less than the amount of the performance bond.” The FAR adds the timing, requiring the bonds to be in place “before receiving a notice to proceed with the work or being allowed to start work.”
The surety has to qualify too. The Bureau of the Fiscal Service “administers the surety bond program for the federal government”, and it keeps the Treasury Department’s list of companies approved to “directly write federal bonds”. Some other owners ask for a Treasury-listed surety as well.
State, city and private owners set their own terms
State and local public work runs under each state’s own bond laws, often called Little Miller Acts, which differ in which bonds they require and when; those details live on our state pages.
Washington’s highway contract bond form shows one state’s approach: a single contract bond covering performance and payment, whose principal and surety “are jointly and severally held and bound unto the State of Washington”. It states that “This bond shall cover all approved change orders as if they were in the original contract.” Our Washington page covers that state’s own requirements.
On private work, the owner or general contractor sets bond terms in the contract, often on bond forms published by the American Institute of Architects. When a federal contract grows by change order, consent of surety is what the FAR calls “an acknowledgment by a surety that its bond given in connection with a contract continues to apply to the contract as modified.”
License and permit bonds are a different animal. SBA’s page draws the line cleanly: “Contract bonds ensure the terms of a specific contract are fulfilled. Commercial bonds ensure all applicable laws and regulations are followed.” A contractor license bond is the second kind, and a claim against it does nothing for a bonded job.
When a surety says no: the SBA guarantee
A younger or smaller paving company may find sureties unwilling to write its bonds. The Small Business Administration offers a backstop: “SBA guarantees surety bonds for certain surety companies, which allows the companies to offer surety bonds to small businesses that might not meet the criteria for other sureties.”
SBA “guarantees bid, performance, and payment surety bonds issued by certain surety companies”, but it draws a hard line at the other kind: “SBA guarantees contract bonds, but doesn’t guarantee commercial bonds.” A license bond is outside it. On cost, “SBA does not charge a fee for bid bond guarantees”, while performance and payment bond guarantees carry a fee set by SBA.
The guarantee does not waive underwriting. You still have to meet the participating surety’s credit, capacity and character standards and sign its indemnity agreement, and SBA shares in what the surety recovers from you after a loss. The program page also points transportation contractors to the U.S. Department of Transportation’s Bonding Education Program. The insurance side of the same road contract is on our paving contractor insurance page.
Send us your latest financial statements, your work-in-progress schedule and the bond requirements from the next bid package you plan to chase, and request a quote; we will line up the bonds alongside the insurance the same contract demands.