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Performance Bond vs Payment Bond
What each one protects, and when you need both
You won the bid. Now the contract says you need a performance bond and a payment bond, and nobody stopped to explain why you need both or what each one actually does. Here is the plain-English answer, from a team that has placed these bonds for contractors for 30+ years.
The short answer: A performance bond protects the project owner by guaranteeing you finish the job according to the contract. A payment bond protects your subcontractors and suppliers by guaranteeing they get paid for their labor and materials. On most public and commercial projects you need both, and they are usually issued together as a single "P&P" package for one combined premium.
Published June 22, 2026
Performance bond vs payment bond at a glance
Both are contract surety bonds. Both are a three-party promise between you (the principal), the project owner (the obligee), and the surety company that backs the bond. They protect different people from different risks on the same job.
| Performance Bond | Payment Bond | |
|---|---|---|
| What it guarantees | The project gets finished per the contract | Subs and suppliers get paid |
| Who it protects | The project owner (obligee) | Subcontractors, laborers, material suppliers |
| Risk it covers | A stalled or defaulted project | Unpaid bills and mechanics' liens |
| Who files a claim | The owner | Unpaid subs and suppliers |
| When you buy it | Before breaking ground | Usually at the same time |
What a performance bond actually protects
A performance bond guarantees that you will complete the project according to the terms of the contract. The party it protects is the project owner, also called the obligee.
If you default, walk off the job, or fail to deliver what the contract requires, the owner can file a claim against the bond. The surety then has options: it can bring in another contractor to finish the work, pay for the owner to complete it themselves, or compensate the owner for the loss, up to the full bond amount.
On most public projects the performance bond is written at 100% of the contract value. That is the surety's maximum exposure, and it is also why qualifying for larger performance bonds takes a stronger financial file. The bond is not insurance for you. It is a guarantee to the owner, and if the surety pays a claim, you are expected to pay the surety back.
What a payment bond actually protects
A payment bond guarantees that the subcontractors, laborers, and suppliers on the job get paid. The parties it protects are the people downstream of you on the project.
Here is why it exists. On a private job, an unpaid sub can file a mechanics' lien against the property to force payment. On a public job you cannot lien government property. The payment bond is the substitute. If you finish the building but stop paying your subs, those unpaid parties file a claim against the payment bond instead of liening the owner's property.
That protects the owner from liens and protects the supply chain from going unpaid when a contractor runs short. It is the bond that keeps the people who actually did the work from getting stiffed.
Why performance and payment bonds are issued together
On the same project, the two bonds cover the two ways a job goes wrong. The performance bond covers the work not getting done. The payment bond covers the people not getting paid. An owner needs both risks handled, so the law and most contracts require both.
Because they are sold together, you usually pay one combined premium for the pair. Both bonds share the same three parties and the same underwriting file, so the surety reviews you once and issues both. When people say "P&P bonds," this package is what they mean.
These are different from a bid bond, which comes earlier in the process and guarantees you will honor your bid and provide the performance and payment bonds if you win. The bid bond gets you to the table. The P&P bonds get you through the job. For the full lineup, see our guide to the types of surety bonds.
When the law requires both bonds
On federal construction, the requirement comes from the Miller Act. The statute (40 U.S.C. chapter 31) sets the bonding requirement for federal public building and public works contracts above $100,000. In practice, the Federal Acquisition Regulation (FAR 28.102-1) is the rule contractors actually run into, and it requires both a performance bond and a payment bond on construction contracts that exceed $150,000.
For federal construction contracts between $35,000 and $150,000, you do not always need full P&P bonds. The contracting officer can require an alternative payment protection instead (FAR 52.228-13). Above $150,000, both bonds are the standard.
States have their own versions, called "Little Miller Acts," and the thresholds vary widely. Some states require bonds on public work over $100,000, others kick in far lower. State and local requirements change, so confirm the exact threshold for your project with the awarding agency before you bid.
What performance and payment bonds cost
Contract surety bonds are priced as a percentage of the contract amount, not a flat fee. For well-qualified contractors, the premium for performance and payment bonds together typically runs about 1% to 3% of the contract value. Newer contractors and those with credit or financial challenges generally pay toward the higher end or more.
Because the two bonds are issued as a package, you pay one premium for both, not two separate charges. On a $500,000 project, a qualified contractor might pay somewhere in the range of $5,000 to $15,000 depending on their file and the surety. Your actual rate depends on your financial strength, your track record, your credit, and the size of the job. For a full breakdown of what drives your rate, see how much contractor bonds cost.
How contractors qualify for performance and payment bonds
Qualifying for P&P bonds is a real underwriting process, not a quick credit pull. Sureties evaluate three things, often called the three C's: capital (your financial strength), capacity (your ability to do the work), and character (your track record and reputation). For a deeper look, read how contractors qualify for bonds.
Smaller bonds can often be approved on a one or two-page application and solid personal credit. As the bond size grows, the surety wants more: company and personal financial statements, work-in-progress schedules, references, and a history of completing similar-sized jobs. The stronger and better-organized your file, the more capacity you get and the better your rate.
If you have been turned down before, or you are newer with a thin track record, that does not mean you are out of options. Different sureties have different appetites, and the right one for your situation depends on your file. That is the part most contractors get wrong on their own, and it is exactly where a specialist broker earns their keep.
Performance and payment bonds vs other contract bonds
It helps to see where these two fit among the bonds you run into on a project:
- Bid bond: Submitted with your bid. Guarantees you will honor the bid and furnish the P&P bonds if awarded.
- Performance bond: Guarantees the project gets completed per the contract.
- Payment bond: Guarantees subs and suppliers get paid.
- Maintenance bond: Kicks in after completion. Guarantees your work against defects for a set warranty period.
On a typical public job you move through them in that order: bid bond to compete, performance and payment bonds to do the work, maintenance bond to back it afterward.
Frequently asked questions
Do I need both a payment and performance bond?
On most public and larger commercial projects, yes. They cover different risks, so owners almost always require both, and they are usually issued together. Some private or smaller projects may only require a performance bond. Check your contract and confirm with the project owner.
Who pays for a performance bond?
The contractor buys the performance bond and includes the cost in the project bid. So the owner ultimately funds it as part of the contract price, but the contractor handles the bond and deals with the surety.
How much does a performance bond cost?
Performance and payment bonds together typically cost about 1% to 3% of the contract amount for well-qualified contractors, with higher rates for newer or credit-challenged contractors. Because the bonds are issued as a package, you pay one premium for both.
Is it hard to get a performance bond?
Smaller bonds backed by strong personal credit can be approved quickly on a short application. Larger bonds require financial statements and a track record of completing similar work. If your file is weak or you have been declined before, a specialist broker can match you to a surety with the right appetite.
When is a performance bond required?
On federal construction, performance and payment bonds are required on contracts exceeding $150,000 under FAR 28.102-1. States set their own thresholds through "Little Miller Acts," and many private owners require bonds by contract. Always confirm the requirement for your specific project.
What is the difference between a performance bond and a bid bond?
A bid bond comes first and guarantees you will honor your bid and provide the performance and payment bonds if you win. The performance bond comes after award and guarantees you complete the project. The bid bond gets you to the table; the performance bond carries you through the job.
Bidding a job that needs both bonds?
Take the free Grit Bond Scorecard to see where your bonding stands and what it takes to qualify for the performance and payment bonds your project requires. Or call the Grit team at (801) 505-5500.