Performance and Payment Bonds in Construction
Bonds protect the owner and the people downstream — not the contractor that buys them. Know what each bond covers before you agree to provide one.
Last reviewed: May 26, 2026 by the BizLeaseCheck Editorial Team
General information, not legal advice.
Overview
Surety bonds are three-party guarantees: the contractor (principal), the owner or obligee, and the surety. Unlike insurance, the contractor must reimburse the surety for what it pays out.
Construction contracts often require performance bonds (guaranteeing completion) and payment bonds (guaranteeing payment to subs and suppliers). On federal projects these are required by the Miller Act.
Topics to check
A performance bond protects the owner if the contractor fails to complete the work per the contract. A payment bond protects subcontractors and suppliers if they are not paid, and on public jobs it substitutes for the mechanic’s lien they cannot file.
A surety bond is not insurance for the contractor — the surety can seek reimbursement (indemnity) from the contractor and its owners for claims it pays.
Surety bond (Cornell LII Wex)The Miller Act requires performance and payment bonds on most federal construction contracts above a threshold and gives unpaid subcontractors and suppliers a right to sue on the payment bond. State "Little Miller Acts" apply similar rules to state and local public work.
Miller Act payment-bond rights are an important backstop for subs and suppliers because public property generally cannot be liened.
Miller Act bonds — 40 U.S.C. §§ 3131, 3133 (Cornell LII)Smaller contractors that cannot qualify for bonding on their own may use the SBA Surety Bond Guarantee program, in which the SBA guarantees bid, performance, and payment bonds issued by participating sureties up to program limits.
Before agreeing to provide a bond, confirm who pays the premium, the bond amount relative to the contract, and the indemnity you and your owners will sign to the surety.
SBA — Surety BondsKey takeaways
- Performance bonds guarantee completion; payment bonds guarantee payment to subs and suppliers.
- A surety bond is not insurance — the contractor reimburses the surety for claims paid.
- The Miller Act requires bonds on most federal projects and lets subs sue the payment bond.
- Public property generally cannot be liened, so payment bonds are the substitute.
- The SBA Surety Bond Guarantee program helps small contractors get bonded.
Official resources
Legal-review notes
Guide confidence marker: Needs lawyer verification.
- Bond thresholds, claim notice periods, and Little Miller Act rules vary by jurisdiction.
- Confirm bond requirements and surety indemnity obligations with a construction attorney and your surety.
- This guide is general information from the BizLeaseCheck Editorial Team, not legal advice.
Frequently asked questions
Is a surety bond the same as insurance?
No. Insurance spreads risk and pays the insured’s loss. A surety bond guarantees the contractor’s obligation to a third party, and the surety can seek reimbursement from the contractor for what it pays out.
What protects subcontractors on a public project?
The payment bond. Because public property generally cannot be liened, unpaid subs and suppliers pursue the payment bond — on federal jobs under the Miller Act, and on state/local jobs under "Little Miller Act" statutes.
Is this legal advice?
No. This is general information for issue-spotting. Construction-contract enforceability — pay-if-paid, no-damages-for-delay, indemnity, lien and lien-waiver rules, retainage limits, and prompt-payment rights — varies by state and by whether the project is public or private, so confirm high-stakes points with a construction attorney licensed in the project’s state.