Surety Bond vs Performance Bond: Understanding Key Differences

A surety bond is a financial guarantee that protects an obligee (such as a project owner or government agency) if the bonded party fails to meet their obligations. A performance bond, on the other hand, is a specific type of surety bond that ensures a contractor will complete a project according to the agreed-upon contract, timeline, and quality standards.

Although closely related, these terms are not interchangeable. A performance bond falls under the larger umbrella of surety bonds, but not all surety bonds are performance bonds. This distinction is especially important in industries like construction, where compliance, accountability, and financial protection play a central role.

Whether you’re a contractor preparing to bid on a government project, a business owner navigating licensing requirements, or simply researching bonding obligations, this resource will give you the tools you need to secure the right type of bond.

 

What is a Surety Bond?

A surety bond is a financial agreement that guarantees contract obligations, compliance, protection, or performance. It’s agreed upon by three parties (the principal, obligee, and surety), and in the event a contractor or business fails to meet their obligations, compensation is paid.

Here’s the roles each party plays:

• The Principal agrees to post bond and carries out work or a service as laid out in an agreement.
• The Obligee is the party requiring the bond, which may be a business client of the principal, a government agency, or a private project owner.
• The Surety guarantees financial compensation to the obligee if the principal fails to carry out their duties.
   

Interestingly, according to EY’s research, bonded projects and agreements are typically the most reliable of all:

“Unbonded projects are more likely to default than bonded projects, perhaps by as much as ten times.”

 

Types of Surety Bonds

Several types of surety bonds offer protection in different circumstances. The four main categories are license and permit bonds, court bonds, fidelity bonds, and contract bonds.

Here’s a little more detail – we support all four types:

• License and permit bonds protect customers from negligence, misconduct, and other noncompliance when working with licensed businesses. They are typically used by freight brokers, auto dealers, and contractors.
• Court bonds support court rulings in the event of a vulnerable party requiring protection, guardianship, or injunction.
• Fidelity bonds protect customers from financial loss against businesses they deal with. Examples include general employee dishonesty and theft bonds.
• Contract bonds are typically used to ensure project owners are compensated if contractors fail to complete work as agreed.
   

What Is a Performance Bond?

A performance bond guarantees that work carried out by a contractor, typically on infrastructure and construction projects, will meet client agreements and standards. Should the contractor breach their contract, a surety will financially compensate an obligee’s claim.

Performance bonds assure obligees that contractors intend to uphold their contracts to agreed standards. In the event this doesn’t occur, however, the obligee has a financial safety net.

 

Types of Performance Bond

Performance bonds are typically split into two different types – conditional and on-demand. The main difference between the types lies in how claims are made.

With conditional performance bonds, obligees prove to sureties that contractual agreements have not been met, and that they have incurred financial losses from this lapse.

On-demand bonds, meanwhile, don’t require obligees to prove contractual breaches. These tend to be the standard bond in many contract cases, though cases vary. We carefully advise and prepare all parties for what to expect, regardless of bond type.

 

Key Differences Between Surety Bonds and Performance Bonds

The main difference between surety bonds and performance bonds is that the latter is a category of the former; surety bond is the umbrella term, and performance bond is a type.

Here’s a quick breakdown:

	Surety Bonds	Performance Bonds
What are they?	Financial instruments that compensate people due a service, contract agreements, or protection	A type of surety bond specifically related to contract adherence
What do they cover?	Various types of agreement – such as employment and project contracts, compliance, and court orders	The guarantee that a contractor will perform as expected via a contract
What are they used for?	Use cases vary – e.g., ensuring principals stay compliant, adhere to employment agreements, offer due care to obligees	Ensuring principals complete projects within the contract timescales and the standards expected
When are they triggered?	Varies – bonds can trigger if agreements are voided, if rules are broken, or if obligees suffer a loss	When work is determined to be ineffective or delivered below contract standards

 

Practical Applications and Examples 

A practical example of a surety bond could be an auto dealer offering assurance that the vehicles they sell are vetted and in good working order. An example of a performance bond might be a construction firm that agrees to complete public building works by a set date.

Surety Bonds in Action

Take the example of a used car dealer. To operate legally in most states, auto dealers are required to secure a surety bond as part of their licensing. This bond protects customers and the state from fraudulent or unethical practices.

If the dealer sells a vehicle with a falsified title, fails to deliver valid paperwork, or engages in other misconduct that causes a financial loss, the harmed party (the obligee) can file a claim against the bond. If the claim is valid, the surety compensates the obligee, and the dealer (the principal) is ultimately responsible for reimbursing the surety.

Performance Bonds in Action

A construction company will use performance bonds to reassure obligees that they will complete their projects within expected safety codes and by dates agreed.

Therefore, if the project deadline for, say, public building works passes, and the obligee suffers financially as a result, they may be able to claim on the bond.

Like with a surety bond, the surety will pay the obligee if their case is sound, and the principal will usually pay a percentage of the bond payout due.

 

Cost Factors for Surety and Performance Bonds

Surety and performance bond pricing varies depending on factors such as the amount to be compensated for, the financial strength of the company involved, and the size and risk factors affecting the project in question. Other factors, such as applicant credit history, are also considered.

Performance and surety bond cost for the principal will usually be a percentage of the total amount set to be compensated for. However, the premiums due on said bonds may vary depending on the risk levels involved.

 

Choosing the Right Bond for Your Business

It’s important to choose the right bond to protect the specific work you do and the clients you serve. For example, if you operate on a license, you may need a license and permit bond, or a fidelity bond if your employees work with clients on your behalf.

To determine the right bond for your business purposes, look carefully at the different types available and consider the end needs of your clients. For example, if you run a cleaning service and send employees into private properties, you’ll need a type of fidelity bond (a janitorial bond) to protect your clients against potential theft.

Narrowing down the ideal bond for your business and customers isn’t always straightforward. Therefore, it’s always important to reach out to a licensed surety bond provider or broker to help run through your options – that’s where Lance Surety comes in.

 

Final Thoughts:

The bottom line is that performance bonds are types of surety bonds, typically reserved for and used in project contracting in the construction and industrial sectors.

It’s always wise to carefully research the bonds you and your clients are likely to need to secure your work. If you’re unsure where to start, you can reach out to the team at Lance Surety and discuss your needs in detail – we’ve supported contractors and business owners across the US since 2010.

Otherwise, if you’re ready to go ahead with a bond, be sure to start your surety bond quote with us online today!

 

Sources

EY. (2022). The Economic Value of Surety Bonds. In surety.org. Retrieved August 20, 2025, from
https://surety.org/wp-content/uploads/2022/11/surety_protects_2022_report.pdf 

How Much Does a Surety Bond Cost in 2025? (n.d.). In Lance Surety Bonds. Retrieved August 20, 2025, from
https://www.lancesuretybonds.com/learn/surety-bond-cost 

Online Surety Bond Application. (n.d.). In Lance Surety Bonds. Retrieved August 20, 2025, from 
https://www.lancesuretybonds.com/surety-bond-quote 

Performance Bond. (n.d.). In Lance Surety Bonds. Retrieved August 20, 2025, from 
https://www.lancesuretybonds.com/contract-bonds/performance-bonds 

What is a Surety Bond? (n.d.). In Lance Surety Bonds. Retrieved August 20, 2025, from 
https://www.lancesuretybonds.com/learn/what-is-a-surety-bond