Bid, performance, and payment bonds: what each one covers in Texas

A developer we talked with last year almost walked away from a school district job in El Paso because of one line in the bid instructions. The package asked for a bid bond, a performance bond, and a payment bond, and the developer's team read that as three separate expenses stacking on top of each other. It is not. It is three different promises, each covering a different risk, and only one of them costs a real premium in the way people assume.

If you own, manage, or develop commercial property in the Borderplex, you will run into surety bonds the moment public money or a lender's requirements enter the picture. Knowing what each bond protects, and who the protection is for, keeps you from getting surprised when a claim lands. Here is the plain version.

A surety bond is a three-party promise, not insurance

Start with the shape of the thing, because it trips people up. A surety bond has three parties: the contractor who buys it, the owner or public entity that requires it, and the surety company that stands behind it. It looks like insurance, but the direction is reversed. Insurance protects the party who buys it. A bond protects the other side.

If the surety ever pays out on a claim, it turns around and collects that money back from the contractor. So a bond is really the surety vouching for the contractor with its own balance sheet, on the understanding that the contractor is good for it. That is why bonding capacity says something real about a general contractor. A surety underwrites the contractor's finances and track record before it will put its name on the line.

Bid bond: the promise to actually sign the contract

The first bond shows up before anyone breaks ground. A bid bond guarantees that if a contractor is the low bidder and wins the award, that contractor will actually enter into the contract at the price it bid.

Here is the risk it covers. A contractor bids a number, wins, then gets cold feet, realizes it left money on the table, and walks. The owner now has to go back to the next acceptable bid, which is higher. The bid bond covers that gap, the difference between the low bid that walked and the next bid the owner accepts.

That exposure is why the bid bond's penal sum is usually capped at 5 to 10 percent of the bid amount, with the exact percentage set by the contracting entity in its bid documents. A bid bond costs the contractor very little, because the surety expects a serious bidder to honor its own number. What the bid bond really signals is that a surety has already looked at this contractor and is willing to back the bigger bonds that come after the award.

Performance bond: the promise to finish the job

Once the contract is signed, the performance bond takes over. It guarantees that the contractor completes the project according to the contract documents. This is the one owners care about most, because it answers the nightmare question: what happens if my contractor defaults halfway through.

If the contractor defaults, the surety has options. It can fund the existing contractor to get across the finish line, hire a replacement contractor to complete the work, or pay the owner up to the bond's penal sum, which is the full contract amount. The owner does not have to eat the cost of a half-built project and start over from zero.

On Texas public work, the performance bond is generally required once the contract passes $100,000. It is written for the full amount of the contract, because that is the maximum the surety might have to spend to make the owner whole.

Payment bond: the promise that subs and suppliers get paid

The payment bond points downhill instead of up. It guarantees that the subcontractors, laborers, and material suppliers on the job get paid, even if the general contractor does not pay them.

On a public project this bond is not optional paperwork, it is the whole safety net. You cannot file a mechanic's lien against public property in Texas. A courthouse, a school, a city facility, none of it can be liened. So Texas Government Code Chapter 2253, known as the state's Little Miller Act, requires the prime contractor to carry a payment bond. When a subcontractor goes unpaid on public work, it cannot lien the building, so it claims against the prime contractor's payment bond instead. The bond stands in for the lien right that public property takes away.

Chapter 2253 sets the thresholds. A payment bond is required when the prime contract exceeds $25,000. When the contract is with a municipality or a joint airport board, that threshold rises to $50,000. A governmental entity under the statute includes the state, a county, a municipality, their departments and agencies, and school districts. If you are developing or managing anything touching that list in El Paso, the payment bond requirement is in play.

What all of this costs

The number owners want is the premium, and it is smaller than most expect. Performance and payment bond premiums are typically quoted as a percentage of the contract value, commonly in the range of 1 to 3 percent for a qualified contractor. A financially strong contractor with a clean track record pulls toward the low end of that range. A newer or thinner contractor pays more, if it can get bonded at all.

The bid bond is the cheap one, because its exposure is only the bid-gap capped at 5 to 10 percent of the bid, not the whole contract. And to be clear about who pays: the owner never writes a separate check for any of these. The bonding cost is a line in the contractor's price. What the owner buys is a surety's independent judgment that this contractor can perform.

One more thing worth knowing. Texas has no statewide contractor licensing bond. Bonding requirements are set by the project, its funding source, and the contract terms. Public work above the statutory thresholds requires performance and payment bonds. Private commercial work does not require them by law, though many lenders require them anyway as a condition of financing.

How a payment bond claim actually works

If you ever sit on the owner or developer side of a bonded public job, it helps to know the claim clock, because a missed deadline kills a valid claim.

• The deadline. A Texas public works payment bond claim must be filed on or before the 15th day of the third month following each month in which the unpaid labor or materials were provided.
• The method. The claim must be mailed by certified mail to both the surety and the prime contractor, and it must include a sworn statement of account detailing what is owed.
• The tiers. First-tier subcontractors and suppliers, those in direct contract with the prime, have direct claims under Section 2253.021. Second-tier claimants, one level further down, have claims only if they meet additional notice conditions.
• Getting the bond. Under Section 2253.026, a governmental entity must furnish a copy of the payment bond and the contract to anyone who applies and submits an affidavit that they supplied unpaid labor or material, contracted for unpaid specially fabricated material, or is being sued on the bond.

One clarification that saves confusion. Chapter 2253 governs public projects. Private commercial and residential bond and lien claims run under Chapter 53 of the Texas Property Code instead, with its own separate deadlines and forms. And just up Interstate 10 in Las Cruces, New Mexico runs its own public bonding statute with different rules, so confirm which jurisdiction governs before you rely on any of these dates.

The short version

Three bonds, three promises. The bid bond says the contractor will sign. The performance bond says the contractor will finish. The payment bond says everyone below the contractor gets paid. On public work over the Chapter 2253 thresholds, the last two are the law.

If you are an owner or developer weighing a bonded project in El Paso or Las Cruces, send your bid set or contract documents to our estimating team for an honest read. We will tell you plainly where the bonding requirements land, what they should cost inside a real number, and whether the job pencils, win the work or not.