A California performance bond is a guarantee from a surety company that you, the contractor, will finish a project according to your contract. On state public works, the Public Contract Code requires one on every contract, set at a minimum of 50% of the contract price, with a separate payment bond alongside it.1California Legislative Information. California Code, Public Contract Code PCC 10222 Private project owners and their lenders often require one too, especially on larger jobs. Premiums typically run 1% to 3% of the contract price, and if you default, the surety makes the owner whole and then collects every dollar back from you under your indemnity agreement.
How a Performance Bond Actually Works
A performance bond is a three-party agreement. You are the Principal. The project owner is the Obligee. The surety company issuing the bond is the Surety. If you fail to finish the work, the surety steps in to make the owner whole, either by arranging for completion or by paying damages up to the bond’s face value.
Here is the part that catches contractors off guard: this is not insurance. When the surety pays out on a claim, you owe that money back. Your indemnity agreement makes you personally and financially liable for every dollar the surety spends resolving your default. The surety is lending its credit on your behalf and expects to be repaid.
A performance bond is also separate from a payment bond, though the two usually travel together on public work. The performance bond guarantees you will finish. The payment bond guarantees you will pay your subcontractors and suppliers. California law requires both on state public works contracts.2California Legislative Information. California Code PCC 10221 – Contract Requirements
When You Need a Performance Bond in California
State Public Works
Public Contract Code Section 10221 requires every state contract to include separate performance and payment bonds executed by an admitted surety insurer. Deposits in lieu of a bond are not permitted.2California Legislative Information. California Code PCC 10221 – Contract Requirements If you are bidding state work, bonding is not optional.
Local Agencies and Districts
Cities, counties, school districts, and special districts set their own bonding amounts within their procurement codes. The 50% statutory floor is a floor, not a cap. Most local public agencies require 100% of the contract price as a matter of standard practice. Always read the solicitation documents rather than assuming the state minimum applies.
Private Projects
No California statute forces a private owner to demand a performance bond. On larger commercial, industrial, and multi-family residential jobs, though, owners and construction lenders routinely make bonding a contract condition. If financing is involved, the lender almost always insists on it before releasing construction draws.
Terms on private jobs are negotiable. Many owners use the AIA A312 Performance Bond form, which carries specific notice requirements and surety response timelines that differ from generic bond language. If you are asked to bond a private project, pay attention to which form the owner specifies, because the claim process depends on the exact document.
Federal Projects
Federal construction work falls under the Miller Act, which requires performance and payment bonds on any federal construction contract exceeding $100,000.3Office of the Law Revision Counsel. 40 USC 3131 – Bonds of Contractors of Public Buildings or Works The contracting officer sets the performance bond amount at whatever level protects the government’s interest, which in practice almost always means 100%. Bonds are submitted on Standard Form 25, and the surety must appear on the Department of the Treasury’s approved list.4U.S. General Services Administration. Standard Form 25 Performance Bond A surety not on that list will have its bond rejected regardless of financial strength.
How Much the Bond Must Cover
Section 10222 sets the state public works floor: each bond must equal at least one-half of the contract price.1California Legislative Information. California Code, Public Contract Code PCC 10222 Agencies routinely require more. Expect 100% on most local projects.
For transportation projects exceeding $250 million, the Department of Transportation has discretion to cap the payment bond at the lesser of 50% of the contract price or $500 million.1California Legislative Information. California Code, Public Contract Code PCC 10222 This keeps bond costs from becoming prohibitive on mega-projects where a full 50% could tie up hundreds of millions of a surety’s capacity on a single job.
What a Performance Bond Costs
Premiums are a percentage of the contract price, typically 1% to 3% for well-qualified contractors. Weaker financials, limited experience, or a prior claims history push the rate higher. The surety re-evaluates your risk profile each time you apply, so your rate can move as your business changes.
On public works, the bond premium is generally a reimbursable contract cost. You build it into your bid and the owner effectively pays. On private work, whether the premium is reimbursed depends on your contract. Either way, budget for it when estimating. Leaving the bond cost out of a competitive bid eats directly into your margin.
How to Qualify for Bonding
Getting bonded is an underwriting process, not a purchase. The surety is deciding whether you can actually finish the project and, if you cannot, whether you have the resources to repay what the surety spends to clean it up.
For smaller contracts, up to roughly $500,000, many sureties will rely primarily on your personal credit, a basic financial statement, and your construction experience. Above that, the file gets thicker. Expect to produce:
- Business financial statements: balance sheets, income statements, and cash flow statements, often CPA-prepared or audited for contracts above $1 million.
- Personal financial statements from every owner with a significant stake, since personal indemnity is required.
- Bank references and two to three years of tax returns.
- A work-in-progress schedule showing every active job, contract value, percentage complete, billings to date, and estimated cost to complete.
- Resumes of key personnel and a list of comparable completed projects.
From all of this the surety calculates your bonding capacity: the maximum total amount of bonded work you can carry at one time. Capacity is not about the single job in front of you. The surety looks at your full workload, backlog, and overhead to decide whether this project would overextend you. Two contractors with identical license classifications can carry very different capacities depending on financial strength and track record.
Project specifics matter too. A technically difficult job with an aggressive schedule and an owner known for slow payment is harder to bond than a straightforward project with a well-funded owner.
If You Keep Getting Turned Down
Smaller and newer contractors who cannot qualify on their own have an option through the U.S. Small Business Administration’s Surety Bond Guarantee Program. The SBA backs a portion of the surety’s risk, which lets the surety issue a bond to a contractor it would otherwise decline. The program covers contracts up to $9 million on non-federal work and up to $14 million on federal contracts. The contractor fee is 0.6% of the contract price, with no fee on bid bond guarantees.5U.S. Small Business Administration. Surety Bonds Your surety agent applies on your behalf.
How Claims Against the Bond Work
When a contractor defaults, the owner must follow the bond’s claim procedures precisely. Sureties look for procedural missteps as grounds to delay or deny, so the process matters as much as the substance.
Notice
The owner starts with written notice to both the contractor and the surety describing the breach and the damages. Under the widely used AIA A312 form, the owner first notifies the contractor and surety that a default declaration is being considered, and the parties may hold a conference before anything is formally declared. The owner then declares default, terminates the contract, and formally notifies the surety. Under A312, a failure to follow the initial notice procedure does not automatically release the surety unless the surety can show it was actually harmed by the oversight.
The Surety’s Options
Once a valid claim is triggered, the surety can:
- Arrange for the original contractor to finish, with the owner’s consent. This is more common than you might expect when the default stems from a cash problem rather than incompetence.
- Take over the project directly, hiring its own contractors or agents.
- Solicit bids and hire a replacement contractor, paying the difference between the remaining contract balance and the actual cost to finish.
- Investigate and pay the owner’s determined liability in cash, up to the bond’s face value.
- Deny the claim if the investigation finds it invalid or the owner caused the problem.
Investigations can take weeks or months. During that time the project often sits idle, which is one of the hidden costs of default that no bond fully compensates. Whatever the surety does, you as the defaulting contractor remain personally liable for reimbursing every dollar it spends.
Time Limits for Claims
California caps construction defect claims against a contractor or surety at 10 years. Under Code of Civil Procedure Section 337.15, no action for latent deficiencies can be brought more than 10 years after substantial completion of the improvement.6California Legislative Information. California Code of Civil Procedure 337.15 The clock starts at the earliest of final inspection by the public agency, recordation of a notice of completion, actual use or occupancy, or one year after work stops.
Federal Miller Act claims are much shorter. An action on a payment bond must be brought no later than one year after the last labor was performed or material supplied, in a United States District Court in the district where the contract was performed.7Office of the Law Revision Counsel. 40 USC 3133 – Rights of Persons Furnishing Labor or Material The bond itself may contain even shorter deadlines, so read the document before assuming you have years.
Bonds That Are Not Performance Bonds
Two other bonds come up often enough that it is worth being clear about what they do not do.
The CSLB contractor’s license bond is not a performance bond. Every licensed California contractor must maintain a $25,000 license bond with the Contractors State License Board.8CSLB. Bond Requirements The amount increased from $15,000 in 2023 under Senate Bill 607. This bond protects consumers harmed by violations of the licensing law. It does not guarantee any particular project will be completed. An owner cannot file a claim against your license bond because you walked off the job.
A home improvement blanket bond is also a distinct product. Business and Professions Code Section 7159.5 lets contractors file a blanket performance and payment bond covering all their home improvement contracts rather than bonding each job individually. The blanket bond must cover 100% of the contractor’s outstanding home improvement obligations.9Legal Information Institute. California Code of Regulations Title 16 858.1 – Blanket Performance and Payment Bond Requirements It does not satisfy public works bonding requirements. If you work both residential home improvement and larger commercial or public jobs, you will likely need both types of bonding in place.