What is the difference between a performance bond and a payment bond?

Who they protect. A performance bond protects the owner: if the contractor defaults, the surety steps in to see the work completed, by funding the existing contractor, arranging a replacement, or paying the owner’s loss up to the bond amount. A payment bond protects the people below the contractor: if the contractor fails to pay its subcontractors and suppliers, they can claim against the payment bond instead of lien rights, which is especially important on public projects where mechanics’ liens are not available against public property. The two are usually issued together, so a single default can trigger both the obligation to finish the work and the obligation to pay those who did it.

How much does a construction bond cost?

The premium is typically in the range of one percent of the contract value for a well-qualified contractor, often tiered so the rate falls on larger contracts, and higher for a contractor the surety sees as riskier. On our $12.0M project a one-percent premium is about $120K. That premium is not the contractor’s risk ceiling, though: a bond is not insurance. If the surety pays out on a default, it pursues the contractor to recover what it paid, under the indemnity agreement the contractor signed to obtain the bond. The premium buys the owner a guarantee and buys the contractor the capacity to bid bonded work, not protection from its own default.

Where does the bond premium sit in the budget?

It is an indirect cost of the project, not tied to any trade. The bond premium is bought because the project as a whole requires it, so it belongs with general conditions, insurance, and the other time-and-project overheads rather than on a scope line. On our example the roughly $120K premium is part of the $1.3M of indirect cost inside the $10.8M cost budget. It is carried like any other cost against the budget, but the bond itself, its issuance, its status, and any claim against it, lives with the surety and the contract, not in the project cost system.

Construction Glossary · Financial & Accounting

Bond &Surety

A third party promises the owner the work gets done and the subs get paid. A bond is a guarantee, not insurance.

Definition

A surety bond is a three-party guarantee: the surety promises the owner (the obligee) that the contractor (the principal) will meet its obligation. A bid bond backs the bid, a performance bond guarantees the work is completed, and a payment bond guarantees that subcontractors and suppliers are paid. The contractor pays a premium, typically around one percent of the contract value, and remains liable to repay the surety.

The three-party guarantee

The owner holds a contract with the contractor and a bond from the surety. The contractor pays the surety a premium and signs an indemnity to repay anything the surety pays out. Three parties, three promises.

Three bonds, three moments

The same surety relationship shows up at three points in a project, each guaranteeing a different promise.

Bond	Guarantees	Protects
Bid bond	The bidder will honor its bid and bond the job	The owner, at award
Performance bond	The work will be completed per contract	The owner, during the work
Payment bond	Subcontractors and suppliers get paid	The tiers below the contractor

The premium is an indirect cost; the payment bond is why unpaid subs on a public job claim the bond rather than file a lien.

How POD handles bond cost

Bonds are issued, priced, and administered by a surety, not by POD. Where you enter the bond premium as an indirect budget line, POD carries it like any other indirect cost against the budget, so the roughly $120K sits with general conditions rather than hiding in a trade. That is the extent of it: POD does not procure bonds, quote premiums, track issuance, or manage a claim against a bond. It records the cost if you give it to POD, and keeps it in the same budget picture as the rest of the job.

Construction cost management guide

Frequently asked questions

The premium is one line of many

A bond protects the owner and sits in the indirect cost of the job, beside general conditions and insurance. See how the indirect side adds up.

Direct vs Indirect Cost Back to the Glossary