Performance Bond vs Payment Bond
A performance bond guarantees the contractor completes the work according to the contract, protecting the project owner. A payment bond guarantees subcontractors and suppliers get paid. A bid bond guarantees the winning bidder will sign the contract and provide the required bonds.
Key facts at a glance
Who requires it
Bid Bond
The project owner / tender authority, as a condition to bid.
Performance Bond
The project owner, as a condition to award the contract.
Payment Bond
The project owner (often mandated on public works).
Who is protected
Bid Bond
The owner, against a bidder that walks away.
Performance Bond
The owner (obligee), against non-completion.
Payment Bond
Subcontractors and suppliers — and the owner, from liens.
Trigger event
Bid Bond
Winning bidder refuses to sign or bond the contract.
Performance Bond
Contractor defaults or abandons the work.
Payment Bond
Contractor fails to pay a subcontractor or supplier.
Coverage period
Bid Bond
Bid validity until contract signature (e.g. 60–120 days).
Performance Bond
From contract start until completion / acceptance.
Payment Bond
The construction period plus a claim window after completion.
Typical cost
Bid Bond
About 0.5%–2% of the bid amount.
Performance Bond
About 0.5%–3% of the contract value.
Payment Bond
Usually bundled with the performance bond premium.
Bid Bond vs Performance Bond vs Payment Bond
| Feature | Bid Bond | Performance Bond | Payment Bond |
|---|---|---|---|
| What it guarantees | The winning bidder will honor the bid and sign the contract. | The contractor completes the work per the contract terms. | Subcontractors and suppliers are paid. |
| Who requires it | Project owner / tender authority. | Project owner (obligee). | Project owner (common on public construction). |
| Who is protected | The owner. | The owner (obligee). | Subcontractors, suppliers and the owner. |
| Trigger | Bidder fails to sign / provide bonds. | Contractor default or abandonment. | Non-payment of labor or materials. |
| Coverage period | Until contract signature. | Contract start to completion / acceptance. | Construction period + claim window. |
| Typical cost | 0.5%–2% of bid amount. | 0.5%–3% of contract value. | Usually bundled with performance bond. |
| Bond amount | Often 5%–10% of the bid. | Typically 50%–100% of the contract value. | Typically 50%–100% of the contract value. |
What is a performance bond?
A performance bond is a surety guarantee that the contractor will complete the project in accordance with the terms, quality, and schedule of the contract. It protects the project owner — the obligee — from financial loss if the contractor defaults or abandons the work.
If the contractor fails to perform, the surety steps in: it can finance the original contractor to finish, arrange a replacement contractor, or pay the owner up to the bond amount. Performance bonds are usually written for 50% to 100% of the contract value and cost roughly 0.5% to 3% of that value.
What is a payment bond?
A payment bond guarantees that the contractor will pay its subcontractors, laborers, and material suppliers. It protects those parties from non-payment, and it protects the project owner from mechanics’ liens filed against the property when the contractor fails to pay.
Payment bonds are especially common on public construction, where suppliers cannot place a lien on public property and instead rely on the bond for recourse. They are frequently issued together with a performance bond, and the payment bond premium is usually bundled into the performance bond cost.
What is a bid bond?
A bid bond guarantees that, if a contractor wins a tender, it will honor its bid, sign the contract at the quoted price, and provide the required performance and payment bonds. It protects the owner from bidders who submit low bids and then withdraw.
If the winning bidder walks away, the surety compensates the owner for the difference between that bid and the next acceptable bid, up to the bond amount — typically 5% to 10% of the bid value. The bid bond comes first, at the tender stage, before the performance and payment bonds take over at contract award.
How they work together on a project
The three bonds cover a project across its full lifecycle. First, the bid bond secures the tender: it guarantees the winning bidder will sign. Once the contract is awarded, the bid bond is released and the performance and payment bonds take effect.
The performance bond then guarantees the work is completed to contract, while the payment bond guarantees everyone below the contractor gets paid. On public works they are frequently required together, so the owner is protected against both non-completion and unpaid liens simultaneously.
Which do you need?
If you are bidding on a tender, you will typically need a bid bond to qualify. Once awarded, the contract almost always requires a performance bond, and public or large private projects usually require a payment bond as well.
ERGO Assurance issues all three — bid, performance, and payment bonds — with agile underwriting and fast issuance. The right combination depends on the contract requirements and the obligee; our team can advise on exactly what your project demands.
Frequently asked questions
Can you have both a performance and payment bond?
Yes. On most public and large private construction projects both are required together. The performance bond protects the owner against non-completion, while the payment bond protects subcontractors and suppliers — and shields the owner from liens.
Is a payment bond the same as a performance bond?
No. A performance bond guarantees the work is completed per the contract and protects the owner. A payment bond guarantees subcontractors and suppliers are paid and protects them, plus the owner from liens. They are distinct guarantees, often issued together.
Who pays for the bond?
The contractor pays the premium, typically 0.5% to 3% of the contract value depending on the bond type and risk. Although the contractor pays, the beneficiary of the guarantee is the owner (performance/bid) or the subcontractors and suppliers (payment).
What happens if the contractor defaults?
Under a performance bond, the surety can finance the contractor to finish, hire a replacement, or pay the owner up to the bond amount. Under a payment bond, unpaid subcontractors and suppliers claim against the bond to recover what they are owed.
Does a bid bond replace a performance bond?
No. A bid bond only covers the tender stage — it guarantees the winner will sign and provide the required bonds. Once the contract is awarded, the performance and payment bonds take over for the duration of the work.
How much does a performance or payment bond cost?
Performance bonds typically cost 0.5% to 3% of the contract value. Payment bonds are usually bundled into the performance bond premium rather than priced separately. Rates depend on the contract size, term, and the contractor’s financial profile.
Need a bid, performance, or payment bond?
ERGO Assurance issues all three, with agile underwriting and fast issuance for tenders and construction contracts worldwide.