Last Updated on October 16, 2026 by Syed Sarim Naqvi
A surety bond is a three-party guarantee, not insurance for the buyer: a surety company promises an obligee, such as a government agency or project owner, that you will meet an obligation, and you pay a premium that generally runs 1% to 15% of the bond amount. The catch is the indemnity: if the surety pays a claim, you are still responsible for repaying it.
Key Takeaways
- A bond involves a principal who must perform, an obligee who requires the bond and a surety who guarantees it
- NFP and Bryant Surety Bonds put premiums at 1% to 15% of the bond amount; for example, a $100,000 bond at 3% costs $3,000
- Palmetto Surety shows credit-based tiers: 1% to 4% for 700+ credit, 4% to 8% for average credit and 8% to 15% for poor credit
- The SBA guarantees contract bonds up to $9 million ($14 million for federal contracts) for a fee of 0.6% of the contract price
- The federal Miller Act requires performance and payment bonds on federal construction contracts above $150,000, according to the Congressional Research Service
What Is a Surety Bond?
NFP describes a surety bond as a contract among three parties: the principal, the obligee and the surety. If the principal defaults, the surety compensates the obligee for losses up to the bond’s value, but the principal must repay the surety. Bryant Surety Bonds stresses that unlike insurance, a bond is not a two-party agreement but a three-party guarantee. Typical bonds include license and permit bonds required by governments, and contract bonds for construction.
What Are Bid, Performance and Payment Bonds?
The Congressional Research Service explains that bid bonds guarantee a bidder will enter into the contract and furnish the required payment and performance bonds if awarded the job. Performance bonds ensure the work is completed, and payment bonds ensure subcontractors and suppliers are paid. BondExchange adds that the Miller Act of 1935 requires payment and performance bonds on qualifying federal public works projects.
| Bond Type | Who Requires It | Reported Cost |
|---|---|---|
| License or permit bond | State or local licensing agencies | Often $50 to $500 for smaller bonds (NFP) |
| Contract bond (bid, performance, payment) | Project owners and public agencies | Priced as a percentage of the contract; SBA fee 0.6% |
| Court bond | Courts | About 0.5% to 1% of the bond amount, per Palmetto Surety |
| Customs bond | Customs authorities | About 2% to 5%, per Palmetto Surety |
How Much Does a Surety Bond Cost?
NFP says premiums generally range from 1% to 15% of the bond amount depending on bond type, credit history, bond amount and risk, with license and permit bonds often costing $50 to $500 for smaller bonds. Palmetto Surety gives a wider 0.5% to 15% range, with most businesses paying 1% to 4% for standard license and permit bonds. BlueNotary says most bonds cost 1% to 10% a year, with small businesses with good credit paying 1% to 3% and bad credit pushing premiums to 8% to 15%. As an illustration, not a quote, a $50,000 bond at the 1% to 4% good-credit band would cost $500 to $2,000, while the same bond at 8% to 15% would cost $4,000 to $7,500. Premiums are paid annually on renewal.
What Does the SBA Do?
The SBA says it guarantees bid, performance and payment bonds issued by certain surety companies, but not commercial bonds, so small businesses that cannot obtain bonds through regular channels can win contracts. Its program covers contracts up to $9 million, and up to $14 million for federal contracts, and charges a fee of 0.6% of the contract price. A Connecticut business group reported the SBA raised those limits starting March 18, 2024, and noted a QuickApp process for contracts up to $500,000 with approvals within hours. The CRS reports the SBA guaranteed 9,633 bid and final surety bonds in fiscal year 2021.
Why Are Bonds Required?
BondExchange says the Miller Act dates from 1935 and requires contractors to bond qualifying federal public works projects. The Congressional Research Service describes the threshold as a federal construction contract exceeding $150,000, while an older article cites $100,000, so check the current figure. Bonds give the obligee a guarantee the work will be completed or paid for, which is why many public and private contracts demand them.
What Should You Check Before Buying?
- Indemnity: you must repay any claim the surety pays
- Credit: Palmetto Surety says score drives the rate tier
- Bond form: use the form your obligee specifies, as states publish their own
- SBA eligibility: contract bonds only, and only for qualifying small businesses
- Renewal: NFP says the premium is typically paid annually
How Does This Connect to Other Business Cover?
Bonds often sit beside insurance for trades. See Contractor Tools and Equipment Insurance Explained and Workers’ Compensation Insurance Explained for contractor cover. Management risk is covered in Directors and Officers (D&O) Insurance Explained, and event cover in Event Cancellation Insurance Explained.
FAQ
Is a surety bond insurance?
No. It is a three-party guarantee, and you repay the surety after a claim.
How much does a surety bond cost?
Generally 1% to 15% of the bond amount a year, depending on credit and bond type.
Can I get a bond with bad credit?
Yes, but expect higher premiums, often 8% to 15%, per Palmetto Surety.
What is the SBA bond program?
A guarantee of contract bonds up to $9 million, or $14 million for federal contracts, for a 0.6% fee.
What is the Miller Act?
A 1935 law requiring bonds on qualifying federal construction contracts.
What are the parties to a bond?
The principal, the obligee and the surety.
How long does a bond last?
Typically one year, with annual renewal.
Glossary
- Principal: the party who buys the bond and must perform.
- Obligee: the party protected by the bond.
- Surety: the company that guarantees performance.
- Penal sum: the bond amount, or maximum payout.
- Indemnity: the principal’s duty to repay the surety.
Sources
- NFP: Surety Bonds Explained (three parties, 1% to 15%, $3,000 example)
- Bryant Surety Bonds: What Is a Surety Bond? (three-party guarantee)
- Palmetto Surety: Commercial Surety Bond Rates (credit tiers, court and customs bonds)
- BlueNotary: How Much Is a Surety Bond? (1% to 10%, small-business range)
- U.S. Small Business Administration: Surety Bonds (guarantee, $9 million and $14 million, 0.6% fee)
- CBIA: SBA Increases Surety Bond Guarantee Limits (March 2024 increase, QuickApp)
- Congressional Research Service: SBA Surety Bond Guarantee Program ($150,000 Miller Act, 9,633 bonds)
- BondExchange: SBA Surety Bond Guarantee Program Explained (Miller Act history, fee example)
Related reading: Professional Liability (E&O) Insurance Explained · Key Person Insurance Explained · Business Interruption Insurance Explained
Published October 2026. Prices and plan terms vary by surety and change often; always read the indemnity agreement and the bond form your obligee requires, and refresh this article periodically.
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