Contractors License Performance Bond
When you win a state contract, the awarding agency will not let you start until your performance and payment bonds are in place. These bonds guarantee you will finish the project and pay every sub and supplier on the job.
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Performance and payment bond approval
Which describes your situation best?
The Miller Act and Little Miller Acts
Federal and state laws mandate performance and payment bonds on public construction projects
Official Federal Requirements
"Before any contract of more than $150,000 is awarded for the construction, alteration, or repair of any public building or public work of the Federal Government, the person awarded the contract shall furnish performance and payment bonds to the United States."U.S. Government • 40 U.S.C. Section 3131 (Miller Act)
Official SBA Guarantee Requirements
"The SBA can guarantee bonds for contracts up to $6.5 million, and up to $10 million for federal contracts if the contracting officer certifies the SBA's guarantee is necessary."U.S. Small Business Administration • SBA Surety Bond Guarantee Program
The federal Miller Act (40 U.S.C. 3131-3134) requires performance and payment bonds on federal projects exceeding $150,000. Every state has enacted its own version, called a "Little Miller Act," that applies to state and municipal contracts. Thresholds vary: California requires bonds on contracts over $25,000, Texas over $100,000, and Florida over $200,000. The bond amount is almost universally set at 100% of the contract price for both the performance and payment bonds.
Performance Bond vs. Payment Bond
Performance Bond
Guarantees the project will be completed according to the plans, specifications, and contract terms. If the contractor defaults:
- Surety can finance the contractor to complete
- Surety can hire a replacement contractor
- Surety can pay the owner the cost to complete
Payment Bond
Guarantees that subcontractors and material suppliers will be paid. On public projects, mechanics liens are not available, so the payment bond is the only remedy:
- First-tier subs can claim directly against the bond
- Second-tier subs must give notice within 90 days
- Claims must be filed within one year of last work
What Underwriters Look For
Three factors determine how much bonding capacity you can get
Financial Strength
- Working capital (current assets minus current liabilities)
- Net worth and equity position
- Reviewed or audited financial statements
- Bank line of credit and liquidity
- Accounts receivable aging
Experience and Track Record
- Years in business and project history
- Largest completed project to date
- Type of work (GC, trade, specialty)
- References from project owners
- No history of bond claims or defaults
Current Backlog
- Work-in-progress schedule
- Percentage of completion on open jobs
- Profit fade or gain on current work
- Available equipment and labor
- Subcontractor relationships
Frequently Asked Questions
What is the difference between a license bond and a performance bond?
A license bond is a condition of holding your contractor license. It covers regulatory violations. A performance bond is tied to a specific project and guarantees you will complete that project according to the contract documents. If you default on the project, the surety either hires another contractor to finish the work or compensates the project owner for the cost to complete.
What bond amount is required for state contracts?
Most states follow the federal Miller Act model and require 100% performance and 100% payment bonds for public contracts exceeding a threshold (usually $100,000 to $250,000 depending on the state). The performance bond guarantees project completion. The payment bond guarantees you will pay your subcontractors and suppliers. These are typically issued as two separate bonds, both at 100% of the contract price.
How is my bonding capacity determined?
Surety underwriters evaluate three things: your working capital (current assets minus current liabilities), your equity or net worth, and your backlog of uncompleted work. A general guideline is that your single project limit is around 10 times your working capital, and your aggregate limit is around 20 times working capital. However, strong financials, experience, and a good track record can stretch these ratios.
Can a new contractor get performance bonds for state projects?
Yes, but capacity will be limited. New contractors typically start with smaller projects in the $250,000-$500,000 range and build their bond program over 2-3 years of successful project completion. The SBA Surety Bond Guarantee Program can help new and small contractors access bonds for projects up to $6.5 million through its guarantee to the surety company.
What happens if I cannot finish a bonded state project?
If you default, the project owner makes a claim against the performance bond. The surety then has three options: finance you to complete the work, hire a new contractor to complete the work, or pay the owner the cost to complete. Under the payment bond, subcontractors and suppliers who are not paid can file claims directly, without needing to sue you first.
How fast can a performance bond be issued?
For contractors with an established bond program and pre-approved capacity, a performance bond for a specific project can be issued in 1-3 business days. New relationships require the surety to review your full financial package first, which can take 1-2 weeks. Plan ahead when bidding on bonded work.
Official Resources
Federal and state contracting bonding authorities
Federal guarantee program helping small and new contractors obtain performance bonds
The federal statute requiring performance and payment bonds on government construction
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Performance and payment bonds issued in 1-3 days for qualified contractors.
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