Surety Bonds Explained:

Bid Bonds, Performance Bonds, and Payment Bonds for Contractors

Bond Insurance: Guaranteeing Performance and Payment

Surety bonds (often called Bond Insurance in casual terms) are three-party agreements that guarantee a contractor or business will fulfill its obligations. Unlike insurance, which protects the policyholder, a bond protects the project owner or obligee. This page focuses on the bonds most commonly needed by contractors in Kansas and Missouri.

Common Types of Surety Bonds:

1. Bid Bond  

Guarantees that if you are awarded the contract you will enter into the agreement and provide the required performance and payment bonds. Usually 5–10% of the bid amount.

2. Performance Bond  

Guarantees you will complete the project according to the contract terms. If you default, the surety may finance completion or pay the obligee up to the bond penalty.

3. Payment Bond  

Guarantees that subcontractors, suppliers, and laborers will be paid. This protects the project owner from liens.

4. License and Permit Bonds  

Required by some cities or states to obtain a contractor’s license or certain permits.

5. Other Commercial Bonds  

Includes court bonds, fidelity bonds, and miscellaneous surety products depending on the need.

What’s Different About Bonds vs. Insurance

  • Bonds are underwritten based on the contractor’s financial strength, experience, and character (the “three Cs”)

  • The contractor signs an indemnity agreement and is ultimately responsible for any loss the surety pays

  • Premiums are lower than insurance relative to the bond amount because the surety expects few losses

  • Claims are less frequent but can be severe; maintaining clean financials is critical

How Much Bonding Capacity Should You Have?

Key factors:

  • Single job size and aggregate program size you need

  • Working capital, net worth, and banking relationships

  • Experience with similar projects

  • Continuity of ownership and management

  • Clean claims history

Many contractors start with smaller bonds and grow capacity as financials strengthen.


The Takeaway

Surety bonds open the door to larger public and private projects. The right bonding program is built on strong financial reporting, realistic project selection, and a surety relationship that grows with your company.

  • 1. Public Project Requirements  

       Most public works projects in both states require performance and payment bonds at 100% of the contract amount once the job exceeds a statutory threshold.


    2. Bid Bond Timing  

       Bid bonds are often needed at the time of bid submission. Establish bonding capacity before you pursue bonded work.


    3. Financial Statement Quality  

       Sureties prefer CPA-prepared or reviewed statements. Year-end timing and quality of reporting affect capacity.


    4. Subcontractor Default  

       Payment bonds protect you from liens, but you still need strong subcontractor prequalification.


    5. Capacity Growth  

       As you complete bonded jobs successfully, sureties are more willing to increase single and aggregate limits.

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Have additional Questions?

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