Surety bond
Also known as: Performance bond · Payment bond · Miller Act bond · Contract bond
A three-party guarantee in which a surety company backs a principal's obligation to an obligee — paying if the principal fails to perform — and then seeks reimbursement from the principal.
Legal basis
40 U.S.C. §3131 (Miller Act)
A surety bond has three parties: the principal who owes the obligation, the obligee who is protected, and the surety that guarantees it. Unlike ordinary insurance, the surety underwrites as if it expects no losses: it underwrites the principal's capacity and character, and the principal usually signs an indemnity agreement to repay anything the surety pays out.
On federal construction, the Miller Act requires both a performance bond and a payment bond — the latter protecting subcontractors and suppliers — before a contract is awarded. The statute sets the threshold at contracts over $100,000; the Federal Acquisition Regulation applies it to construction contracts exceeding $150,000. Sureties writing federal bonds must be certified by Treasury and appear on its Circular 570 list.
Surety underwriting is credit analysis of a company: financial capacity, track record, and who stands behind it. Mapping the principal's owners, related companies and legal history — and monitoring them while the bond is outstanding — is what shows deterioration before a default.
Frequently asked questions
What is the difference between a surety bond and insurance?
Insurance transfers risk from the policyholder to the insurer. A surety bond guarantees the principal's obligation to someone else, and the principal remains responsible: if the surety pays a claim, it seeks reimbursement from the principal.
When is a Miller Act bond required?
For federal construction contracts above the threshold, which the FAR sets at $150,000: the contractor must furnish a performance bond and a payment bond before the contract is awarded.