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Types of Surety Bonds
Contract Bonds, Commercial Bonds, and Everything in Between
Not all surety bonds are the same. The bond you need to bid on a highway project is different from the bond you need to get your contractor's license, which is different from the bond an auto dealer needs to operate a lot. They all share the same three-party structure — principal, obligee, surety — but the obligation being guaranteed and the context in which the bond is required are different for each type.
For contractors, knowing which bonds apply to your situation helps you plan ahead, stay compliant, and avoid scrambling when a project owner, government agency, or licensing board requires proof of bonding.
Surety bonds fall into two major categories: contract surety bonds, which are tied to construction contracts, and commercial surety bonds, which cover a wide range of business and regulatory obligations. This page covers both.
Contract Surety Bonds
Contract surety bonds are the bonds most contractors encounter. They're required on public construction projects — and increasingly on private commercial work — to guarantee that the contractor will bid honestly, complete the project, and pay everyone involved. The Miller Act requires these bonds on all federal projects over $150,000, and most states have similar requirements for state and local government work.
There are four primary types of contract surety bonds. Each serves a different purpose in the construction process, and together they create a framework of financial accountability around the project.
Bid Bonds
A bid bond guarantees that your bid is submitted in good faith, that you'll sign the contract if you win the job, and that you'll provide the required performance and payment bonds. It protects the project owner from contractors who submit bids they can't or won't honor. Bid bonds are typically the first bond required in the process, and they're usually issued at no cost to the contractor when you have an established surety relationship.
If you walk away from a winning bid or can't provide the follow-up bonds, the surety may be required to compensate the project owner — usually the difference between your bid and the next lowest qualified bidder, up to the bond amount.
Performance Bonds
A performance bond guarantees that you'll complete the construction project according to the terms of the contract. If you default — abandon the project, fail to meet specifications, or run into financial trouble that prevents completion — the surety is obligated to step in. The surety may finance a replacement contractor, provide you with financial support to get back on track, or compensate the project owner directly.
Performance bonds are typically required at 100% of the contract value. They're active during the construction phase and generally expire when the project is completed and accepted, unless the contract includes a maintenance or warranty provision.
Payment Bonds
A payment bond guarantees that you'll pay your subcontractors, laborers, and material suppliers. On public projects, this is critical because subcontractors can't file mechanics' liens against government property — the payment bond is their only recourse if the general contractor doesn't pay.
Payment bonds are almost always required alongside performance bonds. On federal projects, the Miller Act mandates both. The payment bond amount typically equals the full contract value, and the premium covers both the performance and payment bonds together.
Maintenance Bonds
A maintenance bond — sometimes called a warranty bond — guarantees your work against defects in materials and workmanship for a specified period after the project is completed and accepted. The maintenance period is typically one to two years, though some public infrastructure projects require longer coverage.
Maintenance bonds are less common than the other three contract bond types, but they appear regularly on public infrastructure projects like roads, bridges, and utilities where long-term performance is critical. Some contracts include maintenance provisions within the performance bond rather than requiring a separate maintenance bond.
Bid Bond vs Performance Bond — What's the Difference?
This is one of the most commonly searched questions in surety bonding, and the answer is straightforward: they protect the project owner at different stages of the project.
A bid bond protects the owner during the bidding process. It guarantees that the contractor's bid is genuine and that the contractor will follow through if selected. The risk it covers is a contractor who wins a job and then backs out — leaving the owner to re-bid or go to the next bidder at a higher cost.
A performance bond protects the owner during construction. It guarantees that the contractor will complete the work according to the contract terms. The risk it covers is a contractor who starts the work but can't finish — due to financial problems, mismanagement, or any other reason.
A bid bond is required to get into the game. A performance bond is required to stay in it. On most bonded projects, you need both — plus a payment bond.
Commercial Surety Bonds
Commercial surety bonds cover obligations outside of construction contracts. They're typically required by government agencies, regulatory bodies, or courts to guarantee that a business or individual will comply with laws, regulations, or legal obligations. While contractors encounter these less frequently than contract bonds, several types are directly relevant to the construction industry.
Contractor License Bonds
Most states require contractors to carry a license bond as a condition of obtaining or maintaining their contractor's license. These bonds protect consumers and the public by guaranteeing that the licensed contractor will comply with state laws, building codes, and regulations. The required bond amount varies by state — some require $10,000, others require $25,000 or more.
License bonds are separate from contract surety bonds. Having a license bond doesn't mean you're bonded for project work — it means you're bonded to comply with your state's licensing requirements.
Auto Dealer Bonds
Auto dealer bonds are required in most states for anyone operating a motor vehicle dealership. They protect consumers against fraud, misrepresentation, and failure to comply with state motor vehicle laws. Bond amounts vary by state, typically ranging from $10,000 to $100,000.
Freight Broker Bonds (BMC-84)
Freight brokers operating in the United States are required by the Federal Motor Carrier Safety Administration (FMCSA) to carry a BMC-84 surety bond in the amount of $75,000. This bond guarantees that the broker will pay carriers and shippers according to their contractual agreements.
Notary Bonds
Notary bonds are required in most states for commissioned notaries public. They protect the public from errors or misconduct in the notarization process. Bond amounts are typically modest — often between $5,000 and $25,000 depending on the state.
ERISA Bonds
The Employee Retirement Income Security Act (ERISA) requires fiduciary bonds for anyone who handles funds or property of an employee benefit plan. These bonds protect plan participants against fraud or dishonesty by the plan fiduciary. The bond amount must be at least 10% of the plan assets handled, with a minimum of $1,000 and a maximum of $500,000 (or $1 million for plans holding employer securities).
Other Commercial Bonds
Beyond the types listed above, there are hundreds of commercial surety bond types covering everything from court fiduciary obligations to utility deposits to customs compliance. If a government agency, court, or regulatory body requires you to post a bond, it likely falls into the commercial surety category.
How Do You Know Which Bond You Need?
The short answer: the entity requiring the bond will tell you. Project owners specify bonding requirements in the bid documents. Government agencies specify them in licensing requirements. Courts specify them in legal proceedings.
If you're a contractor and you're not sure what bond you need, the most common scenarios are straightforward. If you're bidding on a public project, you need a bid bond, and you'll need performance and payment bonds if you win the contract. If you're applying for or renewing a contractor's license, you need a license bond. If you're entering into a federal construction contract over $150,000, the Miller Act determines your bonding requirements.
When the requirement is less clear — or when you're trying to understand how much bonding capacity you need across multiple projects — that's where having a knowledgeable bond agent becomes valuable. At Grit, we help contractors figure out exactly what bonds they need, get them in place quickly, and build the capacity to handle future requirements as their business grows.
Ready to Get Bonded?
Whether you need a contract surety bond for a specific project, a commercial bond for licensing, or you want to build a bond program that supports your growth, our team can help.
Not sure which bond you need? Call us at (801) 505-5500 and we'll sort it out.