A California performance bond is a guarantee from a surety company that you, the contractor, will complete a construction project according to your contract; if you default, the surety either arranges completion or pays the owner up to the bond’s face value. On state public works, the bond is mandatory and must equal at least 50% of the contract price under Public Contract Code section 10222.1California Legislative Information. California Code, Public Contract Code PCC 10222 Private owners can require one by contract, and on larger jobs and financed projects they usually do.
When You Need a Performance Bond in California
The rules depend on who owns the project.
State and Local Public Works
Public Contract Code section 10221 requires every state contract to include separate performance and payment bonds executed by an admitted surety insurer. Deposits in lieu of a bond are not permitted.2California Legislative Information. California Code PCC 10221 – Contract Requirements Section 10222 sets the floor at one-half of the contract price for each bond.1California Legislative Information. California Code, Public Contract Code PCC 10222
That 50% figure is the statutory minimum, not the standard. Many state agencies, and most cities, counties, school districts, and special districts, write their solicitations to require bonds at 100% of the contract value. Read the specific bid documents rather than assuming the floor applies.
One narrow exception exists for very large transportation projects. On contracts exceeding $250 million, the Department of Transportation has discretion to cap the payment bond at the lesser of 50% of the contract price or $500 million.1California Legislative Information. California Code, Public Contract Code PCC 10222
Private Projects
No California statute forces a private owner to demand a performance bond. In practice, larger commercial, industrial, and multi-family residential projects routinely require them by contract, and construction lenders almost always insist on bonding as a funding condition. When a bond is required on private work, the amount, terms, and claim procedures are negotiable. Many owners use the AIA A312 Performance Bond form, which has its own notice requirements and response timelines. If you are asked to bond a private job, look at exactly which form the owner has attached, because that document controls how a claim would unfold.
Federal Projects Performed in California
Federal construction contracts are governed by the Miller Act, which requires performance and payment bonds on any federal construction contract exceeding $100,000.3Office of the Law Revision Counsel. 40 USC 3131 – Bonds of Contractors of Public Buildings or Works The performance bond amount is set by the contracting officer at whatever level is considered adequate to protect the government’s interest, which in practice is almost always 100% of the contract price. Federal bonds must be submitted on Standard Form 25, and the surety must appear on the Department of the Treasury’s list of approved sureties.4U.S. General Services Administration. Standard Form 25 Performance Bond
Boundary: Your CSLB License Bond Is Not a Performance Bond
Every licensed California contractor carries a $25,000 contractor’s license bond with the Contractors State License Board, an amount raised from $15,000 in 2023 under Senate Bill 607.5CSLB. Bond Requirements That bond protects consumers harmed by licensing law violations. It does not guarantee completion of any particular job, and a project owner cannot claim against it because you walked off the work. Different bond, different purpose.
How the Bond Works
A performance bond involves three parties. You are the Principal. The project owner is the Obligee. The surety company is the Surety. If you fail to finish the contract, the surety makes the owner whole up to the face value of the bond.
This is where the bond differs from insurance in a way that surprises some contractors. When the surety pays a claim, you owe that money back. Every surety requires an indemnity agreement, signed personally by the company’s owners, that puts you on the hook for every dollar the surety spends resolving your default. The surety is lending its credit; it expects to be repaid if things go wrong.
A performance bond is also distinct from a payment bond, and on California public works you provide both. The performance bond guarantees completion. The payment bond guarantees that subcontractors and material suppliers get paid.2California Legislative Information. California Code PCC 10221 – Contract Requirements
What a Performance Bond Costs
The premium is a percentage of the contract price, typically 1% to 3% for well-qualified contractors. Contractors with weaker financials, less experience, or a prior claim can pay more. Sureties re-evaluate your risk each time you apply, so the rate you get on your next bond may not match the last one.
On public works, the premium is generally a reimbursable contract cost. You build it into your bid and the owner effectively pays for it. On private work, whether the premium is reimbursed depends on how the contract is negotiated. Either way, include the bond cost when you price the job. Skipping that line item is a quick way to eat your margin on a competitive bid.
How the Application and Underwriting Process Works
Getting bonded is an underwriting exercise, not a purchase. The surety is deciding whether you can actually finish the project, and, if you cannot, whether you have the financial resources to repay what the surety pays out. For smaller contracts, roughly up to $500,000, many sureties will rely mainly on your personal credit score, a basic financial statement, and your construction experience.
Larger contracts trigger deeper review. Expect requests for:
- Business financial statements (balance sheet, income statement, cash flow), often CPA-prepared or audited above $1 million.
- Personal financial statements from every owner with a significant stake, since personal indemnity is required.
- Bank references and tax returns for the last two to three years.
- A work-in-progress schedule listing every active project with contract value, percent complete, billings to date, and estimated cost to complete.
- Resumes of key personnel and a list of comparable completed projects.
From this the surety calculates your bonding capacity, which is the maximum total amount of bonded work you can carry at one time. Capacity is not just about the single job in front of you. The surety looks at your full workload, backlog, and overhead to decide whether adding this project stretches you too thin. Project details matter too: a technically difficult scope with a tight schedule and a slow-paying owner is harder to bond than a straightforward job with a well-funded owner.
Options for Smaller Contractors
Newer or smaller contractors who cannot yet qualify for bonding on their own may be able to use the U.S. Small Business Administration’s Surety Bond Guarantee Program. The SBA guarantees a portion of the surety’s risk, which lets the surety issue bonds it would otherwise decline. The program covers contracts up to $9 million on non-federal work and up to $14 million on federal contracts. The contractor pays the SBA a fee of 0.6% of the contract price for the guarantee; bid bond guarantees carry no SBA fee.6U.S. Small Business Administration. Surety Bonds Your surety agent applies on your behalf.
How Claims Against the Bond Work
When a contractor defaults on a bonded project, the owner has to follow the bond’s claim procedures precisely. Sureties look for procedural missteps as grounds to delay or deny.
Notice
The first step is written notice to both the contractor and the surety that a default has occurred or is under consideration, describing the breach and the damages. Under the AIA A312 form, the owner first notifies the contractor and surety that a default declaration is being considered and may request a conference among all three parties. If the owner does not request one, the surety may request one within five business days, and unless the parties agree otherwise the conference occurs within ten business days of the surety receiving notice. The owner then formally declares default, terminates the contract, notifies the surety, and agrees to pay the remaining contract balance to the surety or to whoever finishes the work. Under A312, failure to follow the initial notice procedure does not automatically release the surety unless the surety can show it was actually harmed by the oversight.
What the Surety Can Do
Once a valid claim is triggered, the surety chooses among several paths:
- Work with the original contractor to complete the project, with the owner’s consent. This happens more often than people expect when the default is financial rather than performance-based.
- Take over the project directly using its own contractors or agents.
- Solicit bids, hire a replacement contractor, and pay the difference between the remaining contract balance and the actual cost to finish.
- Investigate and pay the owner the determined amount of liability, up to the bond’s face value.
- Deny the claim if the investigation finds it invalid or concludes the owner caused the problem.
Investigations can take weeks or months, and the project often sits idle in the meantime. That downtime is a real cost of default that no bond fully compensates. Whichever route the surety takes, the defaulting contractor remains liable to the surety for every dollar it spends.
Deadlines to File
California imposes a 10-year outer limit on construction defect claims, including claims against a surety. Under Code of Civil Procedure section 337.15, no action for latent deficiencies in construction can be brought against any person or their surety more than 10 years after substantial completion.7California Legislative Information. California Code of Civil Procedure 337.15 The 10-year clock starts at the earliest of final inspection by the public agency, recordation of a notice of completion, actual use or occupancy, or one year after work stops.
The bond document itself may impose shorter claim deadlines than the statute. Read the bond language before assuming you have years to act. If negotiation with the surety fails, the owner may have to sue on the bond, which is a separate action from any breach-of-contract claim against the contractor, though the two are usually pursued together.