Types of Contract Bonds Explained

Contract bonds guarantee that a contractor will carry out the work that a project owner expects them to, and that all their duties are fulfilled. They are commonly used in public construction projects to ensure contractors complete work safely and on time, maintain public safety, and protect owners against financial loss.

There are multiple types of contract bonds that guarantee different contract stages and elements. In this guide, we explore the most common contract bond types and explain how they work in practice.

What Are Contract Bonds?

Contract bonds are surety bonds that compensate project owners if contractors default on their agreements. A contractor obtains a bond before starting work, offering guarantees to the project owner if they  fail to deliver what they promised. However, contract bonds only guarantee performance and payment - they don’t insure the contractor.

There are three parties involved in a contract bond agreement - the principal (contractor), the obligee (project owner), and the surety (bonding company). 

Before construction work starts, the obligee asks the principal to obtain a contract bond from a surety to guarantee the project’s completion. If, after providing a bond, the principal defaults on the agreement, the obligee may be able to claim compensation.

Contract bonds are required by law in some cases, for example, with respect to Federal building projects:

“The Miller Act requires that prime contractors for the construction, alteration, or repair of Federal buildings furnish a payment bond for contracts in excess of $100,000. Other payment protections may be provided for contracts between $30,000 and $100,000.”

The Miller Act

To obtain a contract bond, the principal must prove that they are financially stable and can be trusted to complete the project type and scope.

Once the principal obtains the bond from a surety, they can provide the obligee with proof, and the latter can agree to the project getting started.

Main Types of Contract Bonds

The main types of contract bonds we offer include bid bonds, performance bonds, payment bonds, and maintenance bonds (or warranty bonds). Each bond protects different contract stages and, therefore, serves very different purposes.

Bid Bond

Bid bonds guarantee that a principal will fulfill the duties promised in their bid to the obligee. They protect obligees if the lowest bidder for a contract reneges on promises, withdraws their bid, or fails to deliver further bonds as required. They are typically obtained at the start of public and private construction projects.

Performance Bond

Performance bonds guarantee that a principal will carry out work to the standards, timescales, and risk mitigations an obligee expects. They are commonly used, again, in construction, but can also apply to service and supply agreements and real estate contracts.

Payment Bond

Payment bonds guarantee that all laborers, external subcontractors, and additional workers hired by a principal contractor will be paid in full, regardless of the principal’s own obligations. Ensuring payments are made helps to keep projects on-schedule and reassures obligees that work will be completed.

Maintenance Bond (also called Warranty Bond)

Maintenance bonds and warranty bonds protect obligees after projects are completed. The principal guarantees that their work will hold up for a certain period of time, effectively covering repair and defect costs should they arise. These bonds are commonly used as part of large public and private developments.

Regardless of the type of contract bond you need, you can get peace of mind with a free online quote from Lance Surety with zero obligations. Fill out a two-minute online application now for the lowest rates in your state.

Frequently Asked Questions

How much do contract bonds cost?

The cost of a contract bond depends on factors such as the type of bond obtained, the amount of money the contract covers, and the contractor’s financial history, experience, and robustness. At Lance Surety, we suggest a reasonable estimate is between 1% and 5% of the contract value, but we evaluate each application on individual credit.

Can I get a contract bond with bad credit?

Yes, you may be able to get a contract bond with bad credit, however, you are more likely to pay higher premiums. The stronger your financial experience and history, the lower your credit risk will be.

Can contract bond requirements vary by project type or location?

Yes. Each state has variations on the Miller Act determining when contract bonds are required for specific projects, and details such as deadlines and procedures for claiming vary. Bond requirements also vary depending on the project, and you must obtain a new contract bond for each specific project.

How Contract Bonds differ from Construction Bonds

The terms “contract bond” and “construction bond” are used interchangeably, mainly because they are typically used in the construction industry. However, contract bonds may be used as part of service contracts (such as catering and waste removal) and supply contracts (such as IT provision and vehicle manufacture).

Sources

Lance Surety Bonds. (n.d.). Bid bonds. Retrieved January 16, 2026, from https://www.lancesuretybonds.com/contract-bonds/bid-bonds 

Lance Surety Bonds. (n.d.). Contract bonds. Retrieved January 16, 2026, from https://www.lancesuretybonds.com/contract-bonds 

Lance Surety Bonds. (n.d.). Maintenance bonds. Retrieved January 16, 2026, from https://www.lancesuretybonds.com/contract-bonds/maintenance-bonds 

Lance Surety Bonds. (n.d.). Online surety bond application. Retrieved January 16, 2026, from https://www.lancesuretybonds.com/surety-bond-quote 

Lance Surety Bonds. (n.d.). Payment bonds. Retrieved January 16, 2026, from https://www.lancesuretybonds.com/contract-bonds/payment-bonds 

Lance Surety Bonds. (n.d.). Performance bonds. Retrieved January 16, 2026, from https://www.lancesuretybonds.com/contract-bonds/performance-bonds 

U.S. General Services Administration. (2009, August). The Miller Act. https://www.gsa.gov/system/files/miller_brochure.pdf