Are bonds required on every municipal project?

No. Federal and most state thresholds require bonds on public construction projects above a dollar amount (often $100k–$250k). Services-only RFPs rarely require bonds.

Can I use a letter of credit instead?

Sometimes, for bid bonds. Performance and payment bonds almost always have to come from a surety. Check the RFP's specific language.

How long does it take to get bonded for the first time?

2–4 weeks from first contact with a surety agent if your financials are ready. Longer if you need to prepare reviewed or audited financial statements.

Bid Bonds, Performance Bonds, and Payment Bonds — Explained

Why bonds exist

Public agencies can't afford to pick a cheap bidder who disappears halfway through the project or stiffs their subcontractors. Surety bonds transfer that risk to a bonding company. If the contractor fails, the bonding company steps in to finish the job or pay the agency damages, then collects from the contractor.

Three kinds of bonds show up in municipal work: bid bonds, performance bonds, and payment bonds. They often come as a package on larger projects.

Bid bonds

A bid bond is submitted with your proposal. It guarantees that if you're selected, you'll actually sign the contract and provide the required performance bond. If you win and walk away, the bonding company pays the difference between your price and the next bidder's price, up to the bond amount — usually 5% or 10% of your bid.

Bid bonds are typically free or very inexpensive. If your surety declines to issue one, that's a signal the job is too large for your current bonding capacity.

Performance bonds

A performance bond is issued after you win and kicks in for the duration of the project. It guarantees you'll complete the work according to the contract. If you default, the surety either hires someone to finish or pays the agency to cover the cost.

Performance bonds are usually 100% of the contract value on public work. Cost is 1–3% of the bond amount, paid upfront. Expect roughly 1% for strong financials and 3% for newer or weaker contractors.

Payment bonds

Payment bonds protect subcontractors and suppliers. If the GC doesn't pay them, they can claim against the bond. This exists because on public projects, subs can't file mechanic's liens — the payment bond is the substitute.

Performance and payment bonds are usually issued together; the 1–3% rate covers both.

How to qualify for bonding

Surety companies underwrite on three Cs: capital, capacity, and character. In plain English: strong financial statements, a track record of similar-sized completed projects, and a clean legal and credit history.

First-time contractors typically qualify for small-project programs (SBA bond guarantee, for example) with simpler requirements. Start there and build a track record of completed bonded projects. Your single-project capacity and aggregate capacity grow with your history.

Practical steps

Get a bonding agent before you need one. Most agents work with many surety carriers and will shop your submission. Build the relationship early and keep your bonding file updated — a current agent can turn around a bid bond in a day; a stranger can't.

When you see a promising RFP, forward the bond requirements to your agent before you spend time on the proposal. Don't write a 40-hour bid for a project you can't actually bond.