Contractors & Builders · Surety Bonds
Performance and Payment Bonds for Texas Contractors
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What Performance and Payment Bonds Actually Are
- Contractor default — the surety investigates the claim and confirms the contractor failed to perform according to the contract
- Surety options — the surety can finance the original contractor to finish, hire a new contractor to complete the work, or pay the owner the bond amount to cover completion costs
- Owner protection — the project owner does not bear the financial risk of contractor failure; the surety absorbs it
- Contractor obligation — the surety will seek reimbursement from you for every dollar it pays out; a bond claim is a debt you owe back to the surety, not free money
Who Needs Them (and What They Cost)
- Indemnity agreement — every bond comes with a personal and corporate indemnity agreement; your personal assets are on the line if the surety pays a claim
- First-tier subcontractors — companies you hire directly to perform portions of the work
- Material suppliers — companies that supply materials directly to you or to your first-tier subcontractors
- Laborers — workers on the project who are not paid their wages
How Bonding Qualification Works
- Equipment rental companies — firms that rent equipment used on the bonded project
- Second-tier subs and suppliers — in Texas, payment bond protection extends to those who contract with your first-tier subcontractors, provided they give proper notice
- Bond amount — performance bond must equal 100% of the contract price; payment bond must also equal 100% of the contract price for contracts over $100,000
- Surety requirements — the surety must be authorized to do business in Texas and listed on the U.S. Treasury's approved surety list
The Canopy Advantage
- Canopy shops 18+ carriers in a single session — catching the pricing spreads between carriers that most Texas businesses never see when buying direct from a single company
- Your dedicated account manager handles the entire process from quoting through binding — eliminating the back-and-forth delays of online-only platforms and call-center runarounds
- Annual policy reviews catch changes in your business or property — growth, new exposures, shifting market conditions — adjusting coverage before a claim exposes a gap
- Canopy’s 99.1% client retention rate reflects proactive service that keeps coverage optimized and premiums competitive year after year without you needing to ask
How much does a $100,000 performance bond cost?
See the detailed section below for a complete answer to this question.What is a contractor performance bond?
See the detailed section below for a complete answer to this question.Where do I get a performance bond in Texas?
See the detailed section below for a complete answer to this question.The Bottom Line Up Front
If you bid on public projects in Texas over $100,000, you are required by law to carry performance and payment bonds. Texas Government Code Chapter 2253 mandates it for state and municipal work, and the federal Miller Act requires it for federal projects over $150,000. Bond premiums run 1% to 3% of the contract value, and qualifying depends on your financials, experience, and credit. Whether the law requires it or a private owner requests it, understanding how surety bonds work is what separates contractors who win big contracts from those who stay small.What Performance Bonds Guarantee
A performance bond is a three-party agreement between you (the contractor), the project owner (the obligee), and the surety company. It guarantees that you will complete the project according to the contract terms. If you default — walk off the job, go bankrupt, or fail to meet specifications — the surety steps in to make the owner whole.What Happens When a Performance Bond Is Triggered
- Contractor default — the surety investigates the claim and confirms the contractor failed to perform according to the contract
- Surety options — the surety can finance the original contractor to finish, hire a new contractor to complete the work, or pay the owner the bond amount to cover completion costs
- Owner protection — the project owner does not bear the financial risk of contractor failure; the surety absorbs it
- Contractor obligation — the surety will seek reimbursement from you for every dollar it pays out; a bond claim is a debt you owe back to the surety, not free money
- Indemnity agreement — every bond comes with a personal and corporate indemnity agreement; your personal assets are on the line if the surety pays a claim
What Payment Bonds Guarantee
A payment bond guarantees that you will pay your subcontractors, laborers, and material suppliers on the project. It protects the people working under you who have no direct contract with the project owner. Without a payment bond, unpaid subs on a public project would have no lien rights since you cannot lien government property.Who Is Protected by a Payment Bond
- First-tier subcontractors — companies you hire directly to perform portions of the work
- Material suppliers — companies that supply materials directly to you or to your first-tier subcontractors
- Laborers — workers on the project who are not paid their wages
- Equipment rental companies — firms that rent equipment used on the bonded project
- Second-tier subs and suppliers — in Texas, payment bond protection extends to those who contract with your first-tier subcontractors, provided they give proper notice
Texas Notice Requirement: Under Texas Government Code Chapter 2253, unpaid claimants who do not have a direct contract with the prime contractor must send written notice to the contractor within the 15th day of the second month after the month in which the labor was performed or the material was delivered. Miss that deadline and you lose your right to claim against the payment bond.
Texas Government Code Chapter 2253
Chapter 2253 is the statute that governs performance and payment bonds on public works projects in Texas. It applies to state agencies, counties, cities, school districts, and all other governmental entities. Every Texas contractor who bids on public work needs to know exactly what this statute requires.| Bond Type | What It Guarantees | When Required (Texas) | Typical Cost |
|---|---|---|---|
| Performance Bond | Contractor will complete the project per contract terms | Public projects over $100,000 | 1% – 3% of contract value |
| Payment Bond | Contractor will pay all subs, laborers, and suppliers | Public projects over $25,000 | Usually included with performance bond premium |
| Bid Bond | Contractor will honor their bid and enter the contract if awarded | Often required at bid submission; typically 5% – 10% of bid | Usually no separate premium if bonded |
Key Chapter 2253 Provisions
- Bond amount — performance bond must equal 100% of the contract price; payment bond must also equal 100% of the contract price for contracts over $100,000
- Surety requirements — the surety must be authorized to do business in Texas and listed on the U.S. Treasury's approved surety list
- Claim filing — payment bond claims must be filed no later than the 15th day of the third month after the month the work was performed or material was furnished
- Statute of limitations — suit on a payment bond must be filed no later than one year after the date of final completion of the contract or one year after the claimant last performed work
- Copy of bond — any potential claimant has the right to request a copy of the payment bond from the governmental entity, which must provide it within a reasonable time
The Miller Act: Federal Project Requirements
If your Texas contracting business bids on federal projects — military base construction, federal courthouse work, VA hospital renovations, or any other project funded by the federal government — the Miller Act applies instead of Chapter 2253. The thresholds and requirements differ from state law.The Miller Act requires performance and payment bonds on all federal construction contracts exceeding $150,000. The performance bond must equal 100% of the contract price. The payment bond amount varies: 100% of the contract price for contracts up to $1 million, 50% for contracts between $1 million and $5 million, and 40% for contracts over $5 million (with a minimum of $2.5 million).Miller Act vs. Texas Chapter 2253 Differences
- Threshold — Miller Act applies at $150,000; Texas Chapter 2253 applies at $100,000 for performance bonds and $25,000 for payment bonds
- Payment bond claims — Miller Act requires claimants without a direct contract to give written notice within 90 days of last furnishing labor or material; Texas has different notice windows
- Suit filing — Miller Act claims must be filed in federal court; Chapter 2253 claims are filed in state court in the county where the project is located
- No lien rights — neither federal nor state public property can be liened, which is precisely why payment bonds exist for public work
How to Qualify for Bonding
Getting bonded is essentially a financial underwriting process. The surety is extending credit on your behalf — guaranteeing to the project owner that you will perform. They want to make sure you have the financial strength, experience, and character to complete the job without the surety ever having to step in.What Sureties Evaluate
- Financial statements — CPA-prepared financial statements are required; for bonds over $250,000, most sureties require reviewed or audited financials
- Working capital — the surety looks at your current assets minus current liabilities; this is the primary measure of your ability to fund ongoing projects
- Net worth — total assets minus total liabilities; sureties want to see a positive and growing net worth trend
- Bank lines of credit — access to credit demonstrates financial flexibility and bank confidence in your business
- Personal credit score — for small and mid-size contractors, the owner's personal credit is a significant factor; most sureties want 680 or higher
- Construction experience — years in business, project types completed, largest project completed, and references from project owners
- Work in progress — the surety needs to see what jobs you have in progress, their status, and your remaining capacity to take on new work
- Claims history — prior bond claims or significant insurance claims are red flags that require explanation
Bonding Capacity Tip: Your bonding capacity — the maximum total amount of bonds a surety will issue for your company — is typically calculated as a multiple of your working capital. A general rule of thumb is 10 to 15 times your working capital for single project limits and 20 to 30 times for aggregate limits. A contractor with $500,000 in working capital might qualify for $5 million to $7.5 million on a single project.
Bond Costs and the SBA Bond Guarantee Program
Bond premiums are calculated as a percentage of the contract value. For most Texas contractors with good financials and experience, premiums run between 1% and 3% of the contract price. A $1 million project will cost $10,000 to $30,000 in bond premiums. The rate depends on your financial strength, project type, and claims history.SBA Surety Bond Guarantee Program
- What it does — the SBA guarantees 80% to 90% of the surety's loss on bonds issued to small and emerging contractors, making sureties more willing to issue bonds to newer businesses
- Eligibility — small businesses that cannot obtain bonding through regular commercial channels; no minimum credit score, but the surety still underwrites the risk
- Bond limits — up to $6.5 million per contract and $10 million in aggregate outstanding bonds under the program
- Cost to contractor — you still pay the bond premium to the surety; the SBA guarantee fee is paid by the surety, not the contractor
- How to apply — work with a surety bond producer (agent) who participates in the SBA program; they will submit the application to the surety who then applies for the SBA guarantee
Surety Company vs. Insurance Company
Contractors often confuse surety bonding with insurance because the same companies frequently offer both products. But the underlying economics and obligations are fundamentally different, and understanding this distinction matters when a claim is filed against your bond.An insurance company expects to pay claims — that is built into the premium model. A surety company expects to never pay claims. The premium covers the surety's underwriting costs and risk assessment, but if a claim is paid, the surety has the contractual right to recover every dollar from you through the indemnity agreement. This is why bond premiums are so much lower than insurance premiums — the surety is not pricing in expected losses the way an insurer does.When you sign an indemnity agreement for a surety bond, you are personally guaranteeing that the surety will be made whole if it pays a claim. This means your personal assets — your house, your savings, your other business interests — are at risk. Spouses are often required to sign the indemnity agreement as well. This is not a scare tactic; it is a standard condition of bonding and it is fully enforceable in Texas courts.The Bottom Line
Performance and payment bonds are the price of admission for public construction work in Texas. Chapter 2253 requires them, the Miller Act requires them on federal projects, and increasingly, private project owners are requiring them too. Bond premiums of 1% to 3% of the contract value are a cost of doing business, and the contractors who invest in building their financial profile — clean books, strong working capital, solid credit, and documented project history — earn better rates and higher bonding capacity. If you are a newer contractor struggling to qualify, the SBA Bond Guarantee Program exists specifically to help you break into bonded work. An experienced surety bond agent can evaluate your current financial position, identify what you need to strengthen, and build a plan to grow your bonding capacity over time. Start that conversation now, not when you find a project you want to bid on.Next step: Get a free quote from Canopy Insurance and let a dedicated account manager evaluate your bonding capacity and connect you with the right surety for your next project.Frequently Asked Questions
How long does it take to get bonded in Texas?
For contractors with strong financials and experience, a bond can be issued in a few days. If you are new to bonding or your financials need additional underwriting review, expect one to three weeks. The biggest delay is usually getting your financial statements in order — CPA-prepared financials are required, and if yours are not current, you will need to get them updated before a surety will consider your application.Can I get bonded with bad credit?
It is difficult but not impossible. Most standard sureties want a personal credit score of 680 or higher from the business owner. Below that threshold, you may need to work with a surplus lines or specialty surety, which will charge higher premiums — often 3% to 5% of the contract value. The SBA Bond Guarantee Program can also help contractors with less-than-perfect credit qualify for bonds, as the SBA guarantee reduces the surety's risk.What happens if a subcontractor files a claim against my payment bond?
The surety will investigate the claim to determine whether the sub is owed money under the contract. If the claim is valid, the surety will pay the subcontractor and then seek reimbursement from you under the indemnity agreement. You are ultimately responsible for every dollar the surety pays out. If you dispute the claim, the surety may require you to deposit funds or post collateral while the dispute is resolved.Do I need bonds for private construction projects in Texas?
Texas law does not require performance or payment bonds on private projects. However, many private project owners, developers, and general contractors require them contractually, especially on larger projects. Private owners use bonds as a risk management tool — it gives them a surety-backed guarantee that the work will be completed and subcontractors will be paid, reducing the risk of mechanics liens on their property.What is a bid bond and how does it work?
A bid bond guarantees that if you are awarded the contract, you will enter into the agreement and provide the required performance and payment bonds. Bid bonds are typically 5% to 10% of your bid amount. If you refuse to sign the contract after winning the bid, the project owner can make a claim on your bid bond for the difference between your bid and the next lowest bidder, up to the bid bond amount. There is usually no separate premium for bid bonds if you have an established bonding relationship.Can I increase my bonding capacity over time?
Yes, and most sureties expect you to grow. The key factors are increasing your working capital, building your net worth, completing projects successfully, and maintaining clean financials and credit. Many surety agents will create a bonding growth plan that identifies specific financial milestones — for example, increasing working capital from $200,000 to $500,000 — that will trigger higher bonding limits. Consistent profitability and on-time project completion are the fastest path to higher capacity.Does my general liability insurance affect my ability to get bonded?
Indirectly, yes. Sureties want to see that you carry appropriate insurance coverage for your operations — general liability, commercial auto, workers compensation, and any specialty coverage your trade requires. A contractor who skimps on insurance signals higher risk to a surety. Additionally, a history of frequent or severe insurance claims can raise concerns about your operational practices, which may affect your bonding underwriting.- Texas Government Code Chapter 2253 — Public Work Performance and Payment Bonds
- U.S. Small Business Administration — Surety Bond Guarantee Program
- The Surety & Fidelity Association of America — Contractor Resources
- U.S. Department of the Treasury — Listing of Approved Sureties
- Texas Department of Insurance — Surety Bond Information
