Performance and Payment Bonds in California: Rules and Cost

A performance bond assures the project owner that the job will be completed, and a payment bond guarantees that subcontractors and suppliers will be paid for their work. In California, a direct contractor on a public works contract over $25,000 must obtain a payment bond of at least 100% of the contract price before commencing work.^[1][2] Performance bond amounts are set by the agency or the contract. Bonding "typically costs 1 percent of the contract amount," and contractors can expect a performance bond to be a one-time premium of about 0.5% to 3%, according to the National Association of Surety Bond Producers (NASBP).^[3]

This guide is intended to help a California contractor facing a first bonded job, a public bid or a private owner who wants bonds. It outlines when each type of bond is required, how the bond amounts are set, what the surety reviews, what bonds cost and what happens if something goes wrong. Once you have the contract's bond requirement in hand, send it to us through our surety bond request and a qualified bond specialist will review it.

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

They protect different people. A performance bond gives the owner assurance that if the contractor defaults, the surety will complete the work, pay to finish it, or reimburse the owner's damages up to the amount of the bond.^[3] A payment bond protects the people who work under the contractor: if the contractor or a subcontractor doesn't pay for labor or materials provided, the surety pays those claimants.^[2][3]

The payment bond matters so much on public projects because a mechanics lien can't be placed against public property. NASBP notes that the payment bond may be the only protection those claimants have.^[3]

When does California require these bonds?

On public works, the payment bond is set by statute. California Civil Code section 9550 requires a payment bond on a public works contract "involving an expenditure in excess of twenty-five thousand dollars ($25,000)," and the public entity must say so in its call for bids.^[1] Section 9554 specifies that the bond be no less than 100% of the total payable, that an admitted surety insurer provide it, and that no deposit can substitute for the bond.^[2]

State agency contracts under the State Contract Act go further. Every contract must provide for separate performance and payment bonds from an admitted surety insurer, and each must equal at least one-half of the contract price, except where Civil Code section 9554 sets the payment bond higher.^[4][5] Cities, counties and districts set the performance bond amount in their bid documents. Read through the instructions to bidders, since 100% is common.

Federal work follows the Miller Act. FAR Part 28 requires both performance and payment bonds on any federal construction contract over $150,000, each at 100% of the original contract price.^[6]

Private work has no legal mandate for either bond. Owners and construction lenders will often require them anyway, and many general contractors also require bonds from their subcontractors.^[3]

How much does a performance and payment bond cost?

NASBP puts it this way: "Bonding typically costs 1 percent of the contract amount. The cost of a performance bond is a one-time premium between 0.5 percent and 3 percent of the contract amount."^[3] Sureties file their rates with state insurance departments, and many reduce the rate for established, financially strong firms. Newer firms may pay more.^[3]

The two bonds are usually priced together. NASBP states that payment bonds are usually issued with performance bonds "for no additional charge," and gives an example: on a $5 million contract, a premium of $26,500 to $40,500 could buy both a performance bond and a payment bond providing $10 million of protection in total.^[3]

A sample using those figures: on a $500,000 public contract, 1% would be $5,000, and the 0.5% to 3% range would run from $2,500 to $15,000. The actual rate is determined by the surety's evaluation of your company. The premium is typically included in your bid, and NASBP notes the owner generally pays it through the first pay request.^[3]

If you use the SBA's surety bond guarantee (below), SBA charges the small business a fee of 0.6% of the contract price on performance and payment bonds, on top of what the surety charges in premium.^[7]

What does a surety check before issuing a bond?

You are borrowing the surety's credit, so the surety underwrites your business like a lender. NASBP lists the factors: credit history and financial strength, experience, equipment, work in progress, management capacity and character.^[3] Expect to provide:

1. Company financial statements, and for larger programs, statements prepared by a CPA.
2. Personal financial statements of the owners.
3. A work-in-progress schedule and a list of completed jobs.
4. Your bank line and references.
5. The contract or bid documents with the bond form and amount.

Before issuing any bond, the surety almost always requires each owner, the owners' spouses and often affiliated companies to sign a general agreement of indemnity (GIA).^[3] That agreement is why a bond is not insurance for you: if the surety pays out on a claim against the bond, it recovers that money from you.

What if I'm a small or new contractor?

Two routes help. Sureties have programs for small contractors that often require less paperwork than standard applications. RLI Surety, for example, writes bid, performance and payment bonds for small contractors through its First Step and Next Step programs.^[8]

The SBA's Surety Bond Guarantee program backs sureties so they will take on small businesses they might otherwise decline. It covers contracts up to $9 million for non-federal work and up to $14 million for federal work, and SBA charges no fee on bid bond guarantees.^[7]

It is best to build bonding capacity before you need it. A surety that already has your financials can issue a bond for a bid deadline within days, whereas a first-time applicant who finds out the day before usually cannot.

What happens if there is a claim?

The surety investigates. If it finds you in default, it may complete the remaining work, hire another contractor or pay the owner's damages up to the bond amount. On a payment bond it pays valid claims from subs and suppliers, and the court may award attorney's fees in an action to enforce the bond.^[2][3] After that, the surety goes back to the indemnity agreement to recover from you and the other indemnitors.^[3]

A contractor's license bond is a completely different bond that serves a different purpose. See our guide to the California contractor license bond for the $25,000 CSLB bond.

This guide is general information based on California and federal law and industry sources dated 2024–2026. Bond requirements come from your contract and the public entity's bid documents, which control. Menlo Insurance Services (CA license 6020106) is a licensed broker that may earn a commission on a placement and does not guarantee that a surety will issue any bond.