Contracts look straightforward until something slips: a delayed steel delivery, a superintendent who quits mid-project, a permit that lingers in review two weeks longer than promised. On construction and infrastructure jobs, these slips can turn into full-on slides. Owners want assurance the project gets finished as agreed, even if the contractor hits trouble. That is where performance bonds live. They are not just paperwork at closing, they are risk-sharing instruments with serious teeth.
I have sat on both sides of the table, first as a project manager fighting weather delays and change directives, then as an advisor digging into bond claims after a contractor went upside down on cash flow. The difference between a messy project that still clears the finish line and a formal bond claim often comes down to simple habits: how expectations were written, how documentation was kept, and how candidly the parties dealt with early warning signs. If you want to understand what is a performance bond, how it functions, and how to avoid the most painful outcomes, start with the relationships it shapes: owner, contractor, surety.
What a Performance Bond Actually Is
A performance bond is a three-party agreement. The principal, typically the general contractor, promises to perform the work under a contract. The obligee, usually the project owner, wants assurance that the work will be completed to the contract terms. The surety, a specialized insurer, evaluates the contractor’s capacity and then issues the bond as a guarantee that, if the contractor defaults, the surety will respond according to the bond’s terms. That response could mean financing the contractor to finish, hiring a completion contractor, tendering a replacement contractor for the owner’s acceptance, or paying up to the bond penal sum.
The bond amount, called the penal sum, is commonly 100 percent of the contract price on public work and anywhere from 50 percent to 100 percent on private jobs. The premium ranges roughly from 0.5 percent to 3 percent of the bonded amount per year depending on the contractor’s credit profile, financials, and the project’s risk. Sureties are not like conventional insurers. They expect to be reimbursed by the principal for any losses. Contractors sign indemnity agreements that often extend to their owners personally and affiliated companies. That is why getting bonded is closer to getting underwritten for credit than buying a typical insurance policy.
The legal backbone for most performance bonds on public work is the Miller Act at the federal level and Little Miller Acts in individual states, which mandate bonds for certain thresholds. On private projects, bonds are a negotiated requirement, often alongside letters of credit or parent guarantees. Forms vary. The AIA A312 is common in building construction. The ConsensusDocs and EJCDC have their own forms. State departments of transportation often use their own language. Small differences matter. Deadlines to declare default, notice provisions, and the surety’s options will change the path of any potential claim.
Why Owners Require Them
Owners insist on performance bonds for two main reasons: completion certainty and leverage. Completion certainty means the project is much more likely to get finished at or near the original scope, even if the contractor falters. Leverage comes from having a credible third party in the room. Sureties evaluate a contractor’s backlog, cash, and capacity. They look at WIP schedules, fade on gross profit, underbillings, and bank covenants. When a contractor knows that mismanagement can end in a default letter to its surety, discipline improves.
For public owners, bonds are also a statutory safeguard. They cannot risk taxpayer funds on non-performance. For private developers, a bond may be required by lenders or investors before a draw is released. Either way, the bond is a tool to align interests. Owners gain recourse. Contractors gain prequalification, which can help win work and secure better subcontractor pricing.
What Triggers a Performance Bond Claim
People often think of performance bond claims as one dramatic event. More often, it is a drip that becomes a stream. A typical path runs like this: chronic schedule slippage, quality defects that persist after punchlist rounds, or non-payment of subs causing work slowdowns. The owner issues cure notices. The contractor disputes responsibility and proposes workarounds. The surety is copied but kept at arm’s length. Meanwhile, cash flow tightens, suppliers stretch terms, and progress stalls. Eventually, the owner sends a notice of default and a demand on the bond.
Default is not a casual label. The owner must satisfy the bond’s conditions precedent. Most forms require the owner to declare the contractor in default, terminate or at least threaten termination, and agree to pay the contract balance to the surety or a completion contractor. If an owner skips steps, the surety can delay or deny liability. I have seen defaults overturned because the owner failed to give the contractually required cure period or did not certify the amount of the remaining contract balance. The bond lives on paper, and the paper rules the day.
How Sureties Respond
Once properly noticed, the surety investigates. It looks at the contract, change orders, schedule updates, correspondence, daily logs, pay applications, and job cost reports. It interviews the owner, architect, subcontractors, and the contractor’s management. It wants to know two things: is the principal actually in default, and what is the most efficient way to finish the job. Surety responses fit into a few patterns:
- Finance the principal: The surety injects funds, sometimes quietly, to stabilize the contractor and push to completion. This is common when the default is arguable, the contractor retains the confidence of key subs, and finishing with the original team costs less than replacement. Tender a completion contractor: The surety proposes another contractor, often one from its stable, and asks the owner to accept them to complete the project under a new contract. Takeover: The surety steps into the principal’s shoes and hires a completion contractor directly, controlling the work and paying costs. Pay the owner: If finishing with any contractor under the bond form would cost more than paying out the penal sum, the surety may pay up to the bond amount and bow out.
The surety’s goal is not to make the owner whole in some broad equitable sense, it is to swiftbonds meet the bond’s obligation at the lowest cost. Expect them to be meticulous, and expect them to lean on technicalities if the owner’s paperwork is sloppy.
Common Misconceptions Worth Clearing Up
A performance bond is not a blank check. If the owner underpays, wrongfully withholds change orders, or disables the contractor’s performance by regularly interfering with the work, the surety will use those facts to reduce or deny liability. Nor is a bond a substitute for a solid contract. Vague scopes, missing milestones, or unbounded allowances set the stage for disputes. A bond is the seatbelt, not the brakes.
Another frequent misconception is that calling the surety early will automatically sink the relationship with the contractor. In practice, looping in the surety as soon as a pattern of trouble emerges can have a stabilizing swift bond rates effect. Surety claims professionals prefer to intervene informally rather than wade into a formal default. Owners who give them time to work behind the scenes often avoid a claim entirely.
Anatomy of a Real Project Problem
On a mid-rise student housing project budgeted at roughly 28 million dollars, the general contractor ran into a familiar trio of issues: joist lead times extended by eight weeks, half the mechanical sub’s field crew turned over, and the developer issued a series of design tweaks to accommodate retail tenants. The GC tried to absorb the shock with overtime and out-of-sequence work. Daily manpower climbed, but productivity fell.
By month eight, the schedule was blown by 12 weeks and the cost reports showed 1.1 million dollars in unapproved change directives. The superintendent kept a hard-copy diary, but the PM’s documentation lagged. The developer withheld part of the progress payment, citing “poor performance,” without a formal deficiency notice. Subs started to slow-walk deliveries. The owner’s rep sent an email threatening to contact the surety.
What prevented a bond claim were three disciplined moves. First, the contractor and design team met to convert directives into priced change orders with time extensions, supported by simple fragnet schedules. Second, the GC’s controller created a segregated cost code for acceleration so the team could track which dollars were base scope versus owner-driven changes. Third, the owner agreed to release disputed sums into escrow pending pricing resolution. The surety was copied on a joint letter summarizing the path forward. The project still finished six weeks late, but nobody filed a default. The bond remained a backstop, not a headline.
How to Avoid Performance Bond Claims as an Owner
Owners cannot control market shocks or a contractor’s internal issues, but they can structure projects to limit the chance of a default. In my experience, the earlier the alignment, the lower the claim risk.
Start with prequalification that goes beyond a glossy proposal. Review the contractor’s last three years of audited financials or CPA-reviewed statements, WIP reports, and bank lines. Verify past performance on jobs of similar size and complexity, not just shiny photos. Call references and ask pointed questions: How did they handle a bad month? How transparent were their cost reports? Did they staff the job with the people they promised?
Contract terms should be fair and specific. “Time is of the essence” means little if the milestones are vague. Include interim milestones, early procurement deadlines for critical materials, and a clear change order process with time impact analysis. Avoid one-sided clauses that push every imaginable risk onto the contractor without paying for it. A lopsided contract can win you a low bid and then cost you six months in claims.
Manage communications like a project asset. Owners who document with clarity have leverage. Capture meetings with concise minutes. Issue formal cure notices when performance dips below contract standards, and give the contractual cure period. Copy the surety when you have credible, documented performance issues, not as a threat but as an FYI that the project needs attention. Keep retainage and progress payments aligned with actual progress. Overpaying early removes your leverage later.
How to Avoid Performance Bond Claims as a Contractor
Contractors often think of the bond as the owner’s tool, but the surety is also a resource. It is in your interest to keep your surety comfortable. They watch liquidity and backlog spread. If they see your gross profit fading quarter after quarter, they will start asking questions. If you surprise them, they will tighten.
Focus on the blocking and tackling. Price the work you are promising to do. Sounds obvious, yet I still see subcontract scopes that omit required testing or a GC proposal that assumes “standard foundation conditions” on a site with a geotech report loaded with caveats. Build a bid-level estimate that distinguishes base scope from assumptions and alternates. Flag long-lead items and propose cash flow that supports deposits. Clarify allowances and unit rates.
On site, measure production. If your framing crew is supposed to hang 10,000 square feet a day and they are hitting 7,200, figure out why by week two, not month four. Track rework hours separately. Segregate acceleration costs. Those buckets become your evidence when negotiating time extensions and change pricing. Early, accurate storyboards beat end-of-project narratives every time.
Communicate risk promptly. When an owner directive affects time, respond with a short time impact analysis, even if rough. If the delay is two weeks now, and could become four if the next milestone compresses, state it. I have never seen a schedule gain two weeks by staying quiet. Bring the surety into the loop if you think cash stress may appear. Contrary to reputation, many sureties will help finance a stuck project if they understand the path to recovery and trust the reporting.
Finally, protect your sub-tier. Pay subs promptly against undisputed amounts. If you are waiting on owner funds, be transparent and offer joint checks. A mad steel fabricator can stop a project faster than any lawsuit.
The Bond Form: Small Words, Big Consequences
Do not gloss over the bond language. The standard AIA A312, for example, requires the owner to notify both the contractor and the surety that it is considering declaring default, then to actually declare default and terminate, and then to agree to pay the balance of the contract price to the surety or a completion contractor. If the owner skips those steps and hires a replacement directly, the surety may argue its obligation never ripened. Some state DOT forms give the surety short election windows, as little as 15 days, to choose a remedy. Missed windows invite disputes.
Similarly, watch for concurrent obligations in the prime contract. If your contract requires a 7-day cure notice before termination and the bond requires a termination to trigger surety obligations, not observing that cure period can tank your claim. Align the timelines. I have edited dozens of contracts to make the cure and default language mirror the bond’s conditions precedent. It is dull work that pays dividends during a crisis.
Early Warning Signs You Should Not Ignore
Projects that end in bond claims usually telegraph trouble months in advance. Pay attention to manpower and money. If a contractor’s monthly pay apps drop in percent complete while crew size stays flat, something is wrong in productivity or quantity takeoff. If underbillings swell without clear owner-caused delays, you are likely looking at inefficiency or unapproved scope. When submittals linger unreturned, resolve the bottleneck before the schedule slips. If the project manager changes three times in the first half of the job, treat it as a step change in risk.
Owners: if your general contractor stops sharing job cost reports or schedule updates, ask why. Contractors: if your surety starts asking for quarterly WIP reviews instead of semiannual, answer quickly and completely. Radio silence hardens positions and makes formal letters more likely.
Claims Handling Tactics That Keep Projects Alive
When tensions rise, formalism helps. If you are an owner facing performance issues, send a notice of consideration of default before you are actually ready to terminate. Invite a meeting with the contractor and surety within a set number of days. In that meeting, request a recovery schedule with resource loading. Ask for a cost-to-complete forecast and proof of sub-tier payment status. Establish a weekly dashboard that tracks three or four objective metrics: critical path activity start and finish, floats on the top five activities, change order log aging, and lien waiver status.
If you are a contractor, prepare a short memo before the meeting that identifies root causes and separates owner-caused, third-party, and contractor-caused buckets. Present a plan that includes resequencing, added supervision, or targeted subcontractor support. Offer to let the surety assign a field consultant. The presence of a neutral scheduler or cost engineer often helps both sides reset expectations without anyone losing face.
When the owner’s instinct is to withhold payment, consider escrow as a pressure valve. Place the disputed amount in a separate account under terms that release funds upon defined milestones or executed change orders. This protects the owner’s rights while keeping cash flowing to the field where it turns into progress.
When a Formal Claim Is Unavoidable
Despite best efforts, some projects cross the line. If a claim is coming, prepare like you are going to trial, even if you hope to settle. Gather contemporaneous documents: executed contracts and bond, RFPs, bid clarifications, subcontracts, CO logs, RFIs with responses, submittal logs, daily reports, photos tied to dates and locations, updated CPM schedules in native format with narratives, pay apps with backup, certified payrolls if applicable, lien waivers, and correspondence threads.
Owners should calculate the cost to complete, the cost of corrections, and delay damages using contractually allowed methods. If the contract has liquidated damages, apply them with math, not emotion. If it does not, be prepared to show actual damages. Contractors should be ready with a counter-story based on excusable and compensable delays, constructive changes, and any owner interferences. Sureties will analyze both sets of facts. Clean, organized files shorten investigations, reduce legal spend, and increase the odds of a pragmatic resolution.
The Quiet Power of Documentation
On a hospital expansion, the GC’s project engineer kept a simple habit: end-of-day photo sweeps by area, labeled by floor and gridline, stored in a shared drive with weekly folders. When the owner later argued that certain ductwork was improperly installed and demanded removal at the GC’s expense, the team could show photos proving the right clearances on the day of install. The issue turned out to be a later change in equipment. The photos saved about 180,000 dollars in rework and shut down a narrative that the contractor was sloppy. That dispute never reached the surety, and the bond remained untouched. People romanticize big legal wins. In practice, tiny habits like labeled photos and signed meeting minutes win more battles.
Practical Checklist: Preventing Performance Bond Claims
Use this quick check during procurement and early construction. It is not exhaustive, but it catches most blind spots.
- Confirm the bond form and the prime contract align on default, cure, and termination procedures, including timelines. Validate the contractor’s financial strength with current financial statements, WIP, and bank line details, not just a bond letter. Set measurable milestones and require monthly schedule updates with narratives and time impact analyses for changes. Track payment discipline: align progress payments to actual progress, release retainage per contract, and monitor lien waivers. Surface issues early: issue cure notices when warranted, copy the surety on material concerns, and set weekly recovery metrics if performance slips.
Another Short List: Signs Your Project May Need Surety Attention
Sometimes the best way to avoid a claim is to invite the surety to the table before default is on the page.
- Two or more consecutive missed milestones without an approved time extension. Growing underbillings alongside rising job-to-date costs and slipping gross profit. Subcontractor notices of intent to lien or repeated payment assurance requests. Turnover in key project staff or a sudden reduction in field supervision. Repeated refusal or delay in providing updated CPM schedules and narratives.
Where Performance Bonds Fit in the Broader Risk Strategy
Bonds sit alongside other risk tools: builder’s risk, subcontractor default insurance, parent guarantees, letters of credit, and retainage. Each has a job. Builder’s risk covers property loss like fire or storm damage. Subcontractor default insurance protects a GC against a sub’s failure, but it does not give the owner completion certainty the way a performance bond does for the GC. Parent guarantees put a corporate balance sheet behind the contractor, but they can be harder to collect and require litigation. Letters of credit are liquid but tie up the contractor’s borrowing capacity. Performance bonds are a balanced option: they leverage a surety’s prequalification, create a practical path to finish, and leave room for professional judgment before a formal claim.
The right combination depends on project type and market conditions. On a 400 million dollar industrial facility with custom equipment, an owner might require both a performance bond and certain vendor performance guarantees tied to factory acceptance testing, along with liquidated damages for late commissioning. On a 10 million dollar municipal library, a standard 100 percent performance and payment bond may be sufficient.
Final Thoughts from the Job Trailer
You can distill this subject to a few truths. A performance bond is a promise backed by a ledger and enforced by procedure. Claims usually stem from people avoiding hard conversations while the project is still saveable. The best way to keep the bond out of the spotlight is to write a fair contract, track reality instead of hope, and escalate with discipline rather than drama.
I have seen surety involvement rescue a project that everyone wrote off, and I have seen owners blow their own claim by skipping a seven-day cure notice. The difference is rarely legal genius. It is steady management, clean documentation, and respect for the bond’s mechanics. If you understand what is a performance bond in that light, not as a form to file but as a relationship to manage, you will avoid most claims and finish more jobs the way you planned: with a tired crew, a satisfied owner, and a bond that stayed in the drawer.