Performance bond
A performance bond is a surety bond that guarantees the project owner the contractor will perform the contract as written. If the contractor defaults, the surety company steps in, up to the bond's amount (its penal sum).
Updated November 9, 2026 · 1 min read
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Who's involved
- Principal: the contractor, who buys the bond.
- Obligee: the owner the bond protects.
- Surety: the company that guarantees the contractor's performance.
Why it matters
For the owner, it's protection against a contractor walking off half-way. For the contractor, it isn't insurance: sureties usually have the contractor sign an indemnity agreement, so anything the surety pays out comes back to the contractor. It's normally paired with a payment bond, which protects subs and suppliers instead.
Federal construction contracts need one under the Miller Act (40 U.S.C. § 3131), and the FAR sets it at 100 percent of the original contract price unless the contracting officer decides a smaller amount is enough. State and local public works have similar rules, and private owners and lenders can require one in the contract.
An example
A county hires a contractor to build a fire station, and the contractor goes out of business with the shell up. The county declares a default under the contract and calls on the surety, which, depending on the bond's terms, may finance the contractor, hire a replacement or pay the county to finish.
Bonds are issued by the surety, not signed through SignMaster. A bond isn't proof of insurance either; owners ask for that separately, as a certificate of insurance.
General information, not legal advice
What a surety must do on default depends on the bond form. Read the bond, not just the contract.