How to Get Your First Performance Bond: A Complete Guide for Contractors
Winning your first major construction project is an exciting milestone for any contractor. But for many contractors, there's one hurdle that can make the project feel much more complicated: the performance bond.
If a project owner requires a performance bond, winning the contract is only part of the process. You also need to qualify for the bond, provide the right financial and business information, and work with a surety company willing to support the project.
For an established contractor, this process can be relatively straightforward. For a contractor seeking a first performance bond, however, it can raise a lot of questions:
How much does a performance bond cost?
Can a new contractor qualify?
What does the surety company look at?
Do you need excellent credit?
How much financial information do you have to provide?
What if you've never had a bond before?
How large can your first bonded project be?
The good news is that not having previous performance bond experience does not automatically mean you cannot qualify.
The key is understanding what sureties look for and preparing your application before you need the bond.
What Is a Performance Bond?
A performance bond is a type of surety bond commonly required on construction projects to provide financial protection to the project owner if the contractor fails to perform according to the terms of the contract.
The three primary parties are:
Principal: The contractor purchasing the bond.
Obligee: The project owner requiring the bond.
Surety: The company providing the bond.
If a contractor defaults and a valid claim is made under the bond, the surety may respond according to the terms of the bond and underlying contract. Depending on the circumstances, the contractor can remain financially responsible for amounts the surety pays.
This is an important distinction between a surety bond and traditional insurance.
A performance bond is not simply an insurance policy protecting the contractor from losses. It is a guarantee supporting the contractor's contractual performance.
When Do Contractors Need a Performance Bond?
Performance bonds are most commonly associated with construction contracts where the project owner wants additional assurance that the contractor will fulfill its contractual obligations.
They may be required on:
Public construction projects
Government contracts
Commercial construction
Large private projects
General contracting projects
Infrastructure projects
Certain subcontracting arrangements
The contract documents should specify whether a performance bond is required and identify the required bond amount.
For example, a project might require a performance bond equal to 100% of the contract price.
If you are bidding on a $500,000 project and the contract requires a 100% performance bond, you may need a $500,000 performance bond.
The exact requirements depend on the contract and applicable laws.
Can a Contractor Get a First Performance Bond?
Yes.
Contractors can obtain their first performance bond without having years of previous bonded-project history.
However, being new to performance bonding doesn't mean the surety has no way to evaluate you.
Instead, the surety will look at the overall picture of your company and its ability to successfully complete the project.
That can include:
Your experience
Financial strength
Credit history
Current workload
Past construction projects
Project size
Type of work
Contract terms
Working capital
Equipment
Management experience
Banking relationship
Business organization
Existing obligations
For a contractor seeking a first performance bond, demonstrating relevant construction experience and financial stability can be especially important.
Step 1: Determine Exactly What Bond the Contract Requires
Before applying for a performance bond, carefully review the contract and bid documents.
Don't simply tell your bond agent:
"I need a performance bond."
Provide the actual contract or bid documents whenever possible.
The surety needs to understand what it is being asked to guarantee.
Look for:
Contract amount
Contract duration
Scope of work
Liquidated damages
Retainage
Warranty requirements
Completion requirements
Insurance requirements
Indemnification provisions
Termination provisions
These details can significantly affect the underwriting process.
A $100,000 straightforward project can present a very different bonding risk from a $100,000 project with unusual contractual requirements.
Step 2: Choose a Surety Bond Professional Early
One of the biggest mistakes a contractor can make is waiting until the project is awarded to start looking for a performance bond.
Ideally, you should talk with a surety bond professional before submitting your bid.
Why?
Because the surety may need time to review your company and financial information.
Your bond professional can also help determine whether the project appears appropriate for your current bonding capacity.
If you wait until the day before the bond is required, there may not be enough time to address underwriting questions.
Start the conversation before you bid.
This is especially important if it will be your first performance bond.
Step 3: Prepare Your Contractor Financial Information
Financial information is one of the most important parts of performance bond underwriting.
The surety wants to understand whether your company has the financial resources necessary to complete the project.
Depending on the size and complexity of the bond, you may be asked for:
Balance sheet
Income statement
Cash flow information
Accounts receivable
Accounts payable
Current assets
Current liabilities
Work-in-progress schedule
Backlog
Bank information
Tax returns
Personal financial statements
Debt information
Larger bond requests generally require more detailed financial information.
Don't panic if you don't have a huge company.
A smaller contractor may still qualify.
The important issue is whether the financial information supports the size and complexity of the project you're trying to bond.
Step 4: Demonstrate Your Construction Experience
If this is your first performance bond, your experience becomes particularly important.
The surety wants to know whether you and your team have successfully performed similar work.
For example, if you're bidding on a $750,000 commercial electrical project, being able to demonstrate experience managing similar electrical projects can strengthen your application.
Relevant experience may include projects completed:
Before forming your current company
While working for another contractor
As a subcontractor
Under a previous employer
As a project manager
As a superintendent
As a qualifying individual
Your surety bond professional can help determine how your previous experience should be presented.
Step 5: Build a Strong Work-on-Hand Report
Your existing workload matters.
Imagine a contractor has a $500,000 project to complete but is already managing $4 million of active construction work.
The surety may have questions about whether the contractor has enough personnel, management capacity, cash flow, and resources to take on another project.
That's why your work-on-hand or work-in-progress schedule can be important.
It should help show:
Current projects
Original contract amounts
Amount completed
Remaining contract value
Estimated completion dates
Gross profit expectations
Current billing
Retainage
Project status
A clear work-in-progress schedule can help the surety understand the contractor's current workload.
Step 6: Review Your Credit Before Applying
Credit is another factor that may be considered during surety underwriting.
This can include:
Business credit
Personal credit
Payment history
Outstanding debts
Judgments
Liens
Bank relationships
Existing obligations
Credit problems don't necessarily mean a contractor cannot obtain a performance bond.
However, significant credit issues can affect underwriting and pricing.
If you know there are problems with your credit, be upfront with your bond professional.
Trying to hide financial problems can create more complications than explaining them from the beginning.
Step 7: Make Sure Your Business Is Properly Licensed
Before requesting a performance bond, make sure your contracting business is properly established.
Depending on the state and type of work, this may include:
Contractor license
Business registration
Tax registration
Local licensing
Professional licensing
Workers' compensation
General liability insurance
Some projects may also have specific licensing or registration requirements.
Your business should be ready to legally perform the work described in the contract.
Step 8: Prepare Your Bond Application
Your surety bond professional will typically collect information needed by the surety.
The application may request information about:
Your Company
Legal business name
Years in business
Ownership
Contractors license
Business structure
Employees
Your Financial Position
Cash
Receivables
Equipment
Debt
Working capital
Net worth
Your Experience
Previous projects
Project size
Project type
Project owners
Completion history
Your Current Work
Active projects
Backlog
Remaining contract amounts
The New Project
Owner
Contract amount
Scope of work
Start date
Completion date
Providing complete information from the beginning can help make the underwriting process more efficient.
Step 9: Understand Your Working Capital
Working capital is an important concept for contractors seeking performance bonds.
A simplified calculation is:
Current Assets − Current Liabilities = Working Capital
Working capital helps indicate the resources available to support ongoing operations.
For example, a contractor might have:
$300,000 in current assets
$200,000 in current liabilities
That would result in $100,000 of working capital.
However, surety underwriting is more complicated than looking at one number.
The quality of the assets, debt structure, profitability, backlog, and other financial factors can all matter.
Step 10: Be Realistic About Your First Bond Size
One of the biggest mistakes a new contractor can make is trying to obtain a performance bond that is far larger than the company's demonstrated capabilities.
If you've never completed a $1 million project, immediately requesting a $5 million performance bond may raise underwriting questions.
A better approach can be to build bonding capacity progressively.
For example:
First stage: Complete smaller projects successfully.
Next stage: Build financial strength and project history.
Next stage: Take on larger bonded projects.
Eventually: Increase your overall single-job and aggregate bonding capacity.
Your actual bonding capacity will depend on your financial position, experience, the surety, and other underwriting factors.
What Does a Surety Look At When Issuing a Performance Bond?
Surety underwriting is often summarized using several major factors.
Character
The surety may evaluate the contractor's reputation, management history, business practices, and track record.
Capacity
Can the contractor actually complete the project?
This includes experience, personnel, equipment, systems, and current workload.
Capital
Does the contractor have sufficient financial resources to support the project?
These three concepts are often referred to as the three Cs of surety underwriting: character, capacity, and capital.
For larger contractors and more complex bonds, underwriting may involve substantially more detailed analysis.
How Much Does a Performance Bond Cost?
Performance bond pricing varies based on several factors.
The surety may consider:
Contract amount
Contractor experience
Financial strength
Credit
Type of project
Contract terms
Bonding history
Overall risk
Performance bond rates are often expressed as a percentage of the bond amount, but there is no single rate that applies to every contractor or project.
For example, a $500,000 performance bond does not necessarily cost the contractor a fixed percentage across all situations.
Your bond professional can obtain a quote based on the actual project and underwriting information.
What If You Also Need a Payment Bond?
Many construction contracts require both a performance bond and payment bond.
The two bonds serve different purposes.
Generally protects the project owner against certain losses associated with the contractor's failure to perform according to the contract.
Generally provides protection relating to payment obligations to certain subcontractors, laborers, and suppliers, subject to the bond's terms and applicable law.
If your contract requires both, tell your bond professional upfront.
You may be able to obtain both as part of the same bonding program.
What If You Have Bad Credit?
Bad credit can make obtaining a performance bond more difficult, but it doesn't necessarily mean the answer is automatically no.
The surety may look at the entire financial picture.
Factors that could help include:
Strong construction experience
Positive financial statements
Good cash position
Strong working capital
Successful project history
Experienced management
Solid banking relationship
Reasonable contract size
If credit problems exist, discuss them with your bond professional before submitting the application.
There may be different underwriting options depending on the circumstances.
What If Your Company Is New?
A newly formed company can face additional underwriting challenges because it doesn't have an extensive company history.
However, a new business may have owners or managers with significant construction experience.
That experience can be relevant.
For example, someone who has spent 15 years managing large construction projects and recently started their own contracting company may have a stronger story to present to a surety than a completely inexperienced contractor.
The key is documenting that experience clearly.
How to Improve Your Chances of Getting Your First Performance Bond
If you're preparing for your first bond, there are several things you can do before approaching a surety.
Keep clean financial records
Make sure your financial statements are accurate and current.
Maintain a strong banking relationship
Your banking relationship can be an important part of your overall financial profile.
Pay bills on time
Payment history matters.
Keep debt under control
Avoid taking on unnecessary obligations immediately before applying for a large bond.
Track every project
Maintain accurate project records and job-cost information.
Know your numbers
You should understand your:
Gross profit
Net profit
Backlog
Accounts receivable
Accounts payable
Working capital
Current debt
Cash position
Don't overcommit
Taking on projects beyond your management and financial capacity can create problems for both your business and your bonding program.
How Far in Advance Should You Apply for a Performance Bond?
Don't wait until the contract is ready to be signed.
Ideally, begin discussing bonding requirements before submitting your bid.
This gives the surety time to review:
Your company
Financial information
Experience
Contract documents
Project owner
Project scope
It also gives you time to resolve potential problems.
For a first-time performance bond, additional preparation time can be especially valuable.
What Happens After the Surety Approves the Bond?
Once the surety approves the bond, your bond professional will coordinate the issuance of the bond.
Depending on the project, the process may involve:
Final underwriting approval
Final contract review
Payment of the premium
Delivery of the bond to the contractor
Submission to the project owner
Make sure the bond accurately reflects the contract requirements.
Errors in the obligee name, bond amount, contract information, or other details can create problems.
What If You Get Denied for Your First Performance Bond?
A denial isn't necessarily the end of your bonding journey.
Ask why the surety declined the request.
Potential concerns might involve:
Insufficient working capital
Limited experience
Weak financial statements
Poor credit
Excessive current workload
Project size
Contract terms
Lack of financial reporting
Unfavorable project risk
Understanding the reason can help you determine what needs to change.
For example, if the issue is financial capacity, you may need to strengthen your balance sheet before pursuing larger projects.
If the issue is experience, completing smaller projects successfully may help build your track record.
Build Your Bonding Capacity Over Time
Your first performance bond can be the beginning of a larger bonding program.
As your company successfully completes projects, maintains strong financial records, and demonstrates consistent profitability and cash flow, you may be able to pursue larger projects.
The goal isn't simply to get one bond.
The goal is to build a bonding relationship that grows with your contracting business.
A strong relationship with a surety professional can help you understand what you need to do to increase your capacity over time.
First Performance Bond Checklist
Before applying for your first performance bond, make sure you have:
Contract or bid documents
Project scope
Project timeline
Current financial statements
Work-in-progress schedule
Current backlog information
Construction experience
Business license
Contractor license
Insurance information
Banking information
Credit information
Ownership information
Completed bond application
The more organized your application is, the easier it is for the surety to understand your business and the project.
Don't Let Your First Performance Bond Hold Up Your Project
Getting your first performance bond can seem intimidating, especially if you've never worked with a surety before.
But preparation makes a major difference.
Start early, understand the contract requirements, organize your financial information, document your construction experience, and work with a surety professional who understands contractors.
Most importantly, don't wait until you've already won the project to figure out whether you can get bonded.
Knowing your bonding position before you bid can help you pursue projects that fit your company's current capabilities.
Get Help With Your First Performance Bond
At All American Bonds and Insurance, we help contractors with the surety bonds they need to pursue construction projects.
Whether you're looking for your first performance bond or you're an established contractor trying to increase your bonding capacity, we can help you understand the bonding process and identify the information needed to move forward.
We can help with:
Don't wait until the last minute to find out what your bonding options are.
Contact All American Bonds and Insurance today.
📞 844-321-2663📧 info@quickerbonds.com🌐 www.QUICKERBONDS.com
Frequently Asked Questions About Getting Your First Performance Bond
Can a new contractor get a performance bond?
Yes. A contractor does not necessarily need years of previous performance bond experience. Sureties may consider the contractor's construction experience, financial strength, management, credit, current workload, and the specific project.
How much does a performance bond cost?
The cost varies depending on the contractor, bond amount, project, financial strength, credit, experience, and other underwriting factors. There is no single rate that applies to every performance bond.
Do you need good credit to get a performance bond?
Good credit can make the bonding process easier, but credit is only one factor considered by sureties. Other factors such as experience, financial strength, working capital, and project size may also be important.
What financial information does a surety need?
Depending on the size of the bond, a surety may request financial statements, work-in-progress schedules, accounts receivable and payable information, tax returns, bank information, and other financial documentation.
Can I get a performance bond without previous bonding experience?
Yes. Previous bonding experience can help demonstrate a track record, but contractors may qualify based on other factors, including relevant construction experience, financial strength, management experience, and the characteristics of the project.
How large can my first performance bond be?
There is no universal first-bond limit. The amount a contractor can qualify for depends on factors such as financial capacity, experience, current workload, project type, and the surety's underwriting requirements.
Do I need a payment bond too?
Some construction contracts require both a performance bond and a payment bond. Review your contract or bid documents to determine exactly which bonds are required.
When should I apply for my first performance bond?
Ideally, start the process before you submit your bid. This gives the surety time to review your company and project and allows you to address potential underwriting issues before the bond is needed.
What happens if my performance bond application is denied?
Ask your bond professional or surety why the application was declined. The issue could involve financial strength, experience, credit, workload, project size, contract terms, or other factors. Understanding the concern can help you determine how to improve your bonding position.
Can All American Bonds and Insurance help me get my first performance bond?
Yes. All American Bonds and Insurance works with contractors seeking performance bonds, payment bonds, bid bonds, and other surety bonds. Contact the team at 844-321-2663 or info@quickerbonds.com to discuss your project and bonding needs.
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