Surety bonds • Contract bonds
Performance Bonds: What They Guarantee, Cost, and Arizona Rules
A performance bond guarantees that a contractor will complete a project according to the contract. If the contractor defaults, the surety can step in to finish the work or pay the project owner, up to the bond amount. Premiums commonly run about 0.5% to 3% of the contract amount, and Arizona public works contracts require a performance bond equal to the full contract amount.
This guide covers what performance bonds guarantee, what they cost, federal and Arizona requirements, and how contractors qualify. Blake Insurance Group is an independent agency, and a licensed agent can help you set up bonding.
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What a performance bond guarantees
A performance bond protects the project owner (the obligee) if the contractor fails to perform. After a valid default, the surety may arrange for completion, finance the original contractor, or pay the owner up to the bond amount (NASBP). The contractor signs an indemnity agreement and must repay the surety for any loss. Performance bonds are usually issued with a payment bond, which protects subcontractors and suppliers; see performance bonds vs. payment bonds.
How much a performance bond costs
Premiums are a percentage of the contract amount, often on a sliding scale where the rate falls as the contract grows. Published guides put most contract bond premiums at about 0.5% to 3%, depending on the contractor’s finances, experience, and credit (JW Surety Bonds, NASBP).
| Contract amount | At 1% | At 2% | At 3% |
|---|---|---|---|
| $100,000 | $1,000 | $2,000 | $3,000 |
| $500,000 | $5,000 | $10,000 | $15,000 |
| $1,000,000 | $10,000 | $20,000 | $30,000 |
Simple percentages for illustration, not quotes. Many sureties use tiered rates that lower the effective cost on larger contracts. See our surety bond cost guide.
Arizona public works requirements
Under A.R.S. § 34-222, contractors on public buildings and public works for Arizona counties, cities, towns, and many special districts must provide, before the contract is signed:
- A performance bond equal to the full contract amount, for the sole benefit of the public body.
- A payment bond equal to the full contract amount, for the sole benefit of people who supply labor or materials.
The surety must hold a certificate of authority from the Arizona Department of Insurance and Financial Institutions; individual sureties are not allowed, and a public body cannot require a particular surety or agent.
Federal Miller Act requirements
For federal construction contracts over $150,000, FAR 28.102-1 requires both performance and payment bonds under the Miller Act. The bid documents state the required bond forms and amounts; read them before you bid. Many bids also require a bid bond first.
How contractors qualify
- Financial statements. Sureties review business and personal financials, often CPA-prepared for larger programs.
- Work-in-progress schedule showing current jobs and backlog.
- Experience and references on similar projects.
- Credit and banking relationships, including a line of credit.
- Indemnity agreement signed by the company and usually its owners.
Small contractors who cannot qualify through normal channels may get help from the SBA Surety Bond Guarantee program, which covers contracts up to $9 million, or $14 million on certain federal contracts.
Performance bond FAQs
How much does a performance bond cost?
Commonly about 0.5% to 3% of the contract amount, depending on the contractor’s finances, experience, and credit. A $500,000 contract at 2% would cost about $10,000.
What is the performance bond amount on Arizona public works?
Arizona law requires a performance bond equal to the full contract amount, plus a payment bond equal to the full contract amount, for covered public works.
Who does a performance bond protect?
The project owner. Subcontractors and suppliers are protected by the payment bond.
What happens if the contractor defaults?
The surety investigates and may arrange completion or pay the owner up to the bond amount. The contractor must repay the surety.
Related guides
- Performance bond vs. payment bond
- Bid, performance, and payment bonds
- Bid bonds
- Arizona contractor license bond
- Surety bonds
- Surety bond cost
- Surety bond cost calculator
- Buy a surety bond online
- South Dakota public works bond
- West Virginia public works bond
- New Mexico public works bond
- Nebraska public works bond
- Kansas public works bond
- Iowa public works bond
- Oklahoma public works bond
- South Carolina public works bond
- Alabama public works bond
- Tennessee public works bond
- Washington public works bond
- Michigan public works bond
- Pennsylvania public works bond
- New Jersey public works bond
- Illinois public construction bond
- Georgia public works bond
- Virginia public works bond
- North Carolina public construction bond
- Ohio public improvement bond
- New York public works payment bond
- Florida public construction bond
- Texas surety bonds
- Payment bonds
- ERISA bonds
- Arizona surety bonds
- Arizona mortgage broker bond
- Arizona collection agency bond
- Arizona TPT bond for contractors
- Court bonds
- Arizona probate bond
- Janitorial bonds
- Types of surety bonds
Important information
Compensation. The link in the partner quote box near the top of this page is sponsored, and Blake Insurance Group may be paid if you make a purchase. Sponsored placement does not affect the other information on this page.
Independent agency. Blake Insurance Group LLC is an independent insurance agency. Licensed insurance producer NPN 16944666. Licensed states: AZ, AL, TX, CA, NY, OH, FL, NC, VA, GA, OK, NM, IA, KS, MI, NE, SC, SD, WV, IL, NJ, PA, TN, and WA. Which insurance companies we can quote depends on our current appointments, the product, and your state. Mentioning a company on this page does not mean we represent it.
Cost figures. Published averages and ranges are cited from the sources named, as of the dates shown. They are not quotes and may not reflect your price, which depends on the insurer, the surety, your credit, the bond type, and underwriting.
Availability. Coverage, prices, discounts, and eligibility vary by insurer, state, and applicant, and are subject to underwriting. The issued policy controls.
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