Construction Performance Bonds: What They Secure and How Default Works

Public owners set performance bond amounts by statute, and the amounts differ. On federal work, the Miller Act requires a performance bond on contracts of more than $100,000 in an amount the contracting officer considers adequate for the protection of the government. Texas requires a performance bond in the amount of the contract on public work contracts over $100,000. Arizona requires a performance bond equal to the full contract amount before a covered public contract is executed, written by a surety holding an Arizona certificate of authority.

California handles performance security agency by agency. County construction contracts under Public Contract Code §20129 require the awarded contractor to execute a faithful performance bond approved by the board, and many cities and special districts set their own amounts in bid documents. On private work, the amount comes from the owner's contract or the lender's terms, and some owners accept other forms of security instead.

A surety's duty to act usually turns on a proper declaration of default. Most bond forms and contracts require the owner to give notice, allow a conference or cure period and then terminate the contract before the surety must respond. Owners who skip steps, stop paying the contract balance or hire a replacement without involving the surety may weaken their claim. The specific steps depend on the bond form, so owners should read it before they send the first default letter.

Once default is established, sureties commonly consider four paths. They can finance the original contractor so it finishes the job. They can arrange a completion contractor and tender it to the owner. They can take over the work and contract for its completion themselves. Or they can pay the owner an amount based on the cost to complete, up to the penal sum, or deny the claim if they believe the default was not justified. The choice depends on the bond form, the work remaining and the contract balance available.

For the contractor, any of these paths creates indemnity exposure. The surety may demand collateral as soon as a claim is made, and the contract balance that remains is typically applied to completion before anything flows back to the principal.

Private owners ask for performance bonds when the contract allows it and the contractor's credit supports it. A developer financing a multifamily or industrial project may need the bond to satisfy a construction lender, which can ask to be named through a dual obligee rider so it has rights if the owner cannot complete. Riders vary, and many sureties condition them on the owner continuing to make payments under the contract.

Developers also meet performance obligations from the other side when cities require improvement security for public streets and utilities. That bond names the city as obligee and the developer as principal, and it follows its own statutory rules rather than a construction contract.

Change orders can raise the surety's exposure without a new bond. Many performance bond forms waive notice of contract changes, so the bonded obligation grows with the contract. Contractors should tell the surety about large change orders anyway, because they affect the WIP schedule and the aggregate program. Owners should confirm whether the bond amount increases with the contract or stays at the original penal sum.

Statutes also limit how long an obligee can sue. In Texas, a suit on a public work performance bond may not be brought after the first anniversary of the date of final completion, abandonment or termination of the contract. Other jurisdictions and private bond forms set their own limits, and some private forms shorten the period. Obligees should calendar the deadline in the bond itself at the start of the job.

The surety's review of a performance bond request is mostly a review of the contractor's ability to finish this job alongside every other open job. Expect questions about the project schedule, self-performed work versus subcontracted scope, key subcontractors and whether they are bonded, the margin built into the bid and how this contract compares in size and type to completed work.

Contract terms get attention too. Underwriters look for uncapped liquidated damages, broad indemnity, long warranty periods, pay-if-paid clauses and design responsibility on design-build work. Sending the contract and bond form with the request lets the surety flag terms early, when the contractor can still negotiate them.