The first time a small contractor sees "bid guarantee required" on a solicitation, it's often a few days before the due date, and that's too late to get bonded from scratch. Surety bonds take some lead time the first time around, so it's worth understanding them before you need one.
This is a practical overview, not legal or insurance advice. Bond requirements come from the solicitation and the law that governs the buying agency, and they differ by level of government and by state.
What a surety bond is
A surety bond is a three-party guarantee. You (the principal) promise the agency (the obligee) that you'll do something. A surety company backs that promise. If you fail, the surety pays the agency or arranges for the work to be finished, and then comes after you to be repaid.
That last part is what makes a bond different from insurance. The surety expects to lose nothing, which is why it looks closely at your finances and experience before it issues one. You'll usually sign a general indemnity agreement, and owners of small firms are commonly asked to sign personally.
The three bonds you'll see most
Bid bond
A bid bond (or other bid guarantee) promises that if you're awarded the contract, you'll sign it and provide the required performance and payment bonds. If you walk away, the agency can collect up to the bond amount, often to cover the difference between your bid and the next one.
For federal contracts, FAR 28.101-2 sets the bid guarantee at no less than 20 percent of the bid price, capped at $3 million. State and local bid bonds are commonly in the range of 5 to 10 percent of the bid, but the solicitation sets the number. Many agencies also accept a certified check or cashier's check instead of a bond.
Performance bond
A performance bond guarantees you'll complete the contract according to its terms. If you default, the surety may finance you to finish, bring in another contractor or pay the agency's costs up to the bond amount. Federal performance bonds are generally 100 percent of the original contract price, and many state and local agencies also ask for 100 percent, though some set lower amounts.
Payment bond
A payment bond guarantees you'll pay your subcontractors and suppliers. On private projects, unpaid subs can place a lien on the property. They generally can't lien public property, so the payment bond is their protection instead. Payment bonds are also commonly set at 100 percent of the contract price.
When bonds are required
Construction is where you'll see bonds most often. At the federal level, the Miller Act requires performance and payment bonds on construction contracts over $150,000 (FAR 28.102-1), and for construction contracts between $35,000 and $150,000 contracting officers must require alternative payment protections. States have their own versions for state and local public works, often called "Little Miller Acts," and each sets its own thresholds and bond amounts.
Outside construction, bonds are less common but do appear:
- Large installation projects, such as structured cabling, security systems or HVAC, that are procured as construction
- Service contracts where an agency wants protection against a vendor walking away mid-term (janitorial, food service, transportation)
- Some large equipment purchases with long delivery schedules
An IT reseller bidding on 40 laptops rarely sees a bond. The same reseller bidding to wire a new school building almost always will. Read the instructions and the special conditions; a bond requirement can be buried in either.
What bonds cost
Many sureties charge little or nothing for a bid bond once you have an established bonding relationship, since it is issued as part of that relationship. Performance and payment bond premiums are a percentage of the contract amount, commonly in the low single digits, depending on the contract size, your financial strength, your credit and your track record. The premium goes in your price. Don't forget it; see how to price a government bid.
How a small firm gets bonded
Find a surety agent or broker
Work with an agent who specializes in contract surety, not only general insurance. They know which sureties write smaller and newer contractors and how to present your file.
Get your paperwork ready
Sureties commonly ask for:
- Business and personal financial statements, often CPA-prepared for larger programs
- Recent tax returns
- A work-in-progress schedule showing current jobs, contract values and percent complete
- A list of completed projects with owners and values
- Bank references and your line of credit
- Resumes of key people
They are judging what underwriters often call character, capacity and capital. Cleaner books and a record of finishing jobs make it easier and cheaper.
Expect a bonding line
If approved, you'll typically get a single-job limit and an aggregate limit (the total bonded work you can have open at once). A new firm often starts with a modest line that grows as you complete bonded jobs.
Consider the SBA Surety Bond Guarantee program
If you can't qualify through normal channels, the SBA's Surety Bond Guarantee program guarantees bid, performance, payment and ancillary bonds issued by participating sureties for eligible small businesses. According to sba.gov, it covers contracts up to $9 million for non-federal work and up to $14 million for federal contracts. SBA charges a fee on performance and payment bonds and none on bid bonds. Check the SBA page for current limits and fees, since they change.
Timing tips
- Get prequalified before you find the perfect bid. A first-time bonding application can take a few weeks.
- Once you have a line, ask your agent how much notice they need per bid. Many can turn around a bid bond in a day or two for an existing client.
- Check the exact bond form the agency requires. Some insist on their own form, and a bond on the wrong form can make a bid nonresponsive.
- Make sure the bond amount, project name and solicitation number match the bid exactly.
- If an addendum changes the scope or value, tell your surety.
Where bonded work shows up
Construction and facilities bids are the most common place to find bond requirements. If you're building toward bonded work, watch open bids in your trade and region, and look at your state's vendor registration rules in our state-by-state guides, since some states also require contractor licensing or prequalification before you can bid on public works. Our guide to small business set-asides is also worth a read if you're competing for federal construction.
Frequently asked questions
How much is a bid bond?
For federal contracts the bid guarantee is at least 20 percent of the bid price, capped at $3 million. State and local bid bonds are commonly 5 to 10 percent of the bid, but the solicitation sets the amount.
When are performance and payment bonds required?
Federally, the Miller Act requires them on construction contracts over $150,000. States have their own laws for public works, and agencies can require bonds on other contracts too.
What if I can't qualify for bonding?
The SBA Surety Bond Guarantee program backs bonds from participating sureties for eligible small businesses on contracts up to $9 million (non-federal) or $14 million (federal), per sba.gov.
Sources: www.acquisition.gov www.acquisition.gov www.acquisition.gov www.sba.gov