What Is a Surety Bond? How It Works, Types, Cost and How to Get One

A surety bond is a written, three-party guarantee. A surety company promises an obligee, usually a government agency or project owner, that a principal will meet an obligation set by a contract, law or regulation [1]. If the principal fails, the surety pays or performs, and the principal must then repay the surety [2].

Key takeaways

• Every surety bond has three parties: the principal who buys it, the obligee it protects and the surety that backs it [1].
• A bond is not insurance for the buyer. The principal signs an indemnity agreement and must reimburse the surety for any claim it pays [2].
• The two broad categories are contract bonds (bid, performance and payment) and commercial bonds (license and permit, court, public official and others) [1].
• The premium is a percentage of the bond amount. Bond sellers quote roughly 0.5% to 10% a year, driven mostly by credit [19][20].
• Federal construction contracts above $150,000 require performance and payment bonds under the Miller Act, as applied by the FAR [6].

What is a surety bond?

The Surety & Fidelity Association of America (SFAA) defines a surety bond as “a three-party written agreement by which one party (the surety) guarantees another party (the obligee) that a third party (the principal) will perform according to the bond, statute, contract or other obligation” [1]. The bond exists to protect the obligee, not the principal [1].

“Surety” on its own means the party obligated to answer for another party’s contract, debt or duty [1]. The bond amount, sometimes called the penalty or bond limit, caps what the surety will pay [20].

Bonds are often required by law [1]. A state may demand one before it issues a license, and a public owner may demand one before it signs a construction contract. Our directory of surety bond agencies lists, by state, the agencies that offer them.

How does a surety bond work?

A bond sits in the background until the principal fails to do what it promised. Then the obligee, or someone the bond protects, files a claim with the surety. California’s contractor licensing board describes the sequence for a license bond [14]:

1. The claimant finds which surety issued the contractor’s bond, using the board’s license lookup.
2. The claimant sends the surety the contract, payment records and evidence of the violation.
3. The surety investigates and decides whether to pay.
4. If the claimant disagrees, it can go to court.

On contract bonds, the surety has more options. SFAA says it may give the contractor technical or financial support, hire a replacement contractor, rebid the work or pay the full bond amount to the obligee [1].

Whatever the surety pays, the principal owes back. That is the core difference between a bond and an insurance policy.

Surety bond vs. insurance

Sureties are insurance companies, and bonds are bought through insurance agents and brokers [1], so they are often called “surety bond insurance.” The economics are different. SFAA’s guidance for contractors states it directly: “Surety bonds are not traditional insurance—sureties are indemnified from loss, meaning they must be repaid if they cover a claim” [2].

That repayment promise is written into an indemnity agreement. The company seeking the bond signs it, and the surety may also require signatures from owners or a spouse or domestic partner [2].

So the buyer of a bond is not covered by it. A contractor that wants its own losses paid needs separate policies, such as general liability insurance for injury and property damage claims, or contractors’ equipment insurance for its tools and machinery.

Types of surety bonds

SFAA groups bonds into two families: contract bonds, used mainly in construction, and commercial bonds, which protect the public and are often part of licensing [1].

License and permit bonds

These are required by a state law, local ordinance or federal rule before a business can get a license or permit [1]. SFAA’s examples include contractor license, motor vehicle dealer, employment agency, liquor and sales tax bonds [1].

California is a typical case. Contractors must keep a $25,000 license bond, or a cashier’s check in the same amount, on file with the Contractors State License Board (CSLB) [14]. The amount rose to $25,000 on January 1, 2023 [12]. It covers every job the contractor takes on during the bond’s life, not each job separately [15].

Some low-claim bonds, such as vehicle certificate of title bonds, are often sold without a credit check at 1% or 1.5% of the bond amount, according to one seller [20].

Contract bonds: bid, performance and payment

Contract bonds guarantee a construction contractor will complete the work and pay those who supply labor and materials [1]:

• Bid bond: backs the contractor’s bid, so the owner is protected if the winning bidder won’t sign the contract and furnish the final bonds [8].
• Performance bond: guarantees the project is completed under the contract terms [11].
• Payment bond: guarantees subcontractors and suppliers are paid [11].

A performance bond is one type of surety bond, not an alternative to one. SFAA also lists maintenance and supply bonds in this family [1]. Federal and state projects generally require contract bonds [1]. They guarantee the contract, not the building itself, which is why owners also look for builders risk insurance on the structure during construction.

Court and fiduciary bonds

Fiduciary bonds guarantee that someone appointed by a court, such as an executor, administrator, guardian or trustee, handles the role faithfully [1]. Judicial bonds are posted by litigants who want a remedy, such as an injunction or an appeal, that the law grants only with a bond protecting the other side [1].

Public official and notary bonds

Public official bonds guarantee the faithful performance of people in positions of trust, including treasurers, tax collectors, sheriffs, court clerks and notaries [1]. In California, a new notary must file a $15,000 bond with the county clerk, covering the four-year commission, within 30 days of the commission start date [16]. Texas requires notary applicants to obtain the bond from a Texas licensed bonding company [17].

A notary bond protects the public from the notary’s errors or misconduct, not the notary [1]. Notaries who want cover for their own mistakes look to errors and omissions insurance.

Federal and other bonds

Federal agencies require bonds for obligations such as customs, excise taxes, Medicare and Medicaid providers and immigration [1]. A miscellaneous group covers lease bonds, utility payment bonds and workers’ comp bonds for self-insured employers [1].

Fidelity bond vs. surety bond

A fidelity bond protects a business against theft or fraud by its own employees. SFAA notes that fidelity bonds started as three-party surety bonds but “today’s fidelity bonds are two party insurance policies” [3]. The same cover is sold as employee dishonesty insurance, a commercial crime policy or a financial institution bond [3].

The practical test is who is protected. A surety bond protects an outside obligee, and the principal repays claims [1][2]. A fidelity bond protects the employer that bought it, like ordinary insurance [3].

How much does a surety bond cost?

The premium is a percentage of the bond amount, called the rate [20]:

Annual premium = bond amount × rate

Sellers quote rates from about 0.5% to more than 10% of the bond amount [19][20]. The rate reflects the expected risk of the bond type and the applicant’s credit, finances and experience [19]. Surety Bonds Direct says some sureties discount multi-year terms [20].

Bryant Surety Bonds publishes sample license bond rates by credit score (checked October 2026; a seller’s figures, not industry data) [19]:

The same seller puts contract bonds at 1% to 3% of the contract amount [19].

Example: a contractor license bond

Maria is applying for a California contractor license and needs the $25,000 bond [14].

• With a 720 credit score and a 1% rate: $25,000 × 0.01 = $250 a year.
• With a 610 score and a 5% rate: $25,000 × 0.05 = $1,250 a year.

Now suppose a homeowner files a claim and the surety pays $8,000. Maria owes the surety $8,000 under her indemnity agreement [2]. The payout also matters to her license: a surety can cancel the bond after paying a claim, and CSLB suspends the license if no replacement bond arrives within 30 days of the cancellation notice [13].

Our business insurance calculator can help estimate the policies a business needs alongside a bond.

How to get a surety bond

Bonds are sold by surety agents and brokers, often called bond producers. SFAA’s guidance on getting bonded follows these steps [1][2]:

1. Confirm the requirement. Read the license rule or contract for the bond type, amount and obligee.
2. Find a bond producer. An independent insurance agent who writes bonds can approach several sureties.
3. Gather documents. Sureties commonly ask for owner Social Security numbers, an EIN, ID, tax returns, year-end financial statements, completed-project lists and credit scores [2].
4. Review the indemnity agreement. Know who must sign and what you are guaranteeing [2].
5. Apply. Contractors use a bid bond request form, or a performance and payment bond request form after award [2].
6. File and track the bond. Ask whether the surety or the principal files it with the obligee, and renew before it lapses. CSLB suggests arranging a new bond four weeks before the old one expires [13].

The SBA Surety Bond Guarantee Program

Small contractors that don’t meet a surety’s standard criteria can ask an SBA-authorized surety agency about the Surety Bond Guarantee Program. SBA guarantees bid, payment, performance and ancillary bonds, but not commercial bonds [11].

Eligible contracts run up to $9 million for non-federal work and $14 million for federal work. The business must be small under SBA size standards and pass the surety’s credit, capacity and character review [11]. SBA charges a fee of 0.6% of the contract price on performance and payment bond guarantees, and no fee on bid bonds [11].

The Miller Act: bonds on federal construction

The Miller Act, now 40 U.S.C. chapter 31, subchapter III [6], requires a contractor on a federal construction, alteration or repair contract to furnish two bonds before the contract is awarded [4]:

• a performance bond protecting the government, which must also cover certain taxes withheld from workers’ wages [4]; and
• a payment bond protecting people who supply labor and materials, which can’t be less than the performance bond [4].

The statute’s text sets the trigger at contracts of more than $100,000 [4]. The current Federal Acquisition Regulation (FAR) applies it to construction contracts exceeding $150,000 [6]. For contracts above $35,000 up to $150,000, the contracting officer selects two or more payment protections, such as a payment bond or an irrevocable letter of credit, and the contractor furnishes one [6].

Above $150,000, both bonds normally equal 100% of the original contract price [7]. A bid guarantee, when required, must be at least 20% of the bid price, up to $3 million [8].

The surety must appear on Treasury Department Circular 570, the government’s list of approved sureties. A bond larger than the surety’s listed underwriting limit needs coinsurance or reinsurance [9]. The Bureau of the Fiscal Service updated the list on August 1, 2026 [10].

SFAA puts finding a bond producer right after identifying a project, ahead of the bond application [2]. A local surety bond agency can check which of its sureties are on the Treasury list.

A supplier or subcontractor that hasn’t been paid within 90 days after its last work or delivery can sue on the payment bond. Suppliers to a subcontractor must first give the prime contractor written notice within those 90 days, and every suit must be filed within one year of the last labor or material [5].

Illustration only: A contractor wins a $2 million federal building contract. It needs a $2 million performance bond and a $2 million payment bond [7]. At the 1% to 3% contract-bond rate one seller quotes, the premium would run about $20,000 to $60,000 [19]. If the bonds carried an SBA guarantee, SBA’s fee would add $12,000 (0.6% of $2 million) [11].

What does “licensed, bonded and insured” mean?

The phrase bundles three separate checks. Licensed means the state has issued the license the work requires. Bonded means a bond is on file, such as California’s $25,000 contractor bond [15]. Insured means the business carries its own policies.

A bond is a limited safety net. CSLB warns that bonds “do not assure the financial or professional integrity or competency of a contractor,” and that $25,000 is often not enough to cover several complaints or a large project [15].

Texas regulators suggest confirming that a contractor is bonded and carries workers’ compensation and general liability insurance. They also advise asking for a certificate of insurance and calling the insurer to confirm the policy [18]. Our guide to the certificate of insurance explains why that form proves a policy but can’t prove a bond.

Frequently asked questions

Is a surety bond the same as insurance?

No. A surety bond is issued by an insurance company but protects the obligee, not the buyer. The principal signs an indemnity agreement and must repay the surety for any claim it pays [2]. An insurance policy is a two-party contract that protects the policyholder [3].

Who pays for a surety bond?

The principal, meaning the business or person required to be bonded, pays the premium [1][20]. The obligee that demands the bond pays nothing, even though it is the party the bond protects.

Can you get a surety bond with bad credit?

Usually, but it costs more. One seller’s published rates rise from 0.75% to 1.5% for scores of 700 and above to 2.5% to 5% for scores between 600 and 649 on license bonds [19]. Some sellers also work with sureties that specialize in applicants with credit problems [20].

What is a surety bond for a notary?

A notary bond is a public official bond that protects people harmed by a notary’s errors or misconduct [1]. California requires a $15,000 bond for the four-year commission [16]. Texas requires the bond to come from a Texas licensed bonding company [17].

How long does a surety bond last?

It depends on the obligation. A California notary bond runs for the four-year commission [16], while license bonds are generally priced as an annual premium that renews [20]. License bonds and licenses often renew on different cycles, so CSLB tells contractors not to assume one renews with the other [13].

The bottom line

A surety bond is a guarantee, not a policy for the buyer. The surety vouches for the principal to the obligee, pays valid claims and then collects from the principal. Cost depends on the bond amount, the bond type and credit. To find one, start with an agent who writes bonds; you can search insurance agents near you or browse all coverage types.

Sources

1. Surety & Fidelity Association of America (SFAA), “What is a Surety Bond?” surety.org
2. SFAA, “How To Get Bonded” presentation (uploaded July 2025). surety.org
3. SFAA, “What is a Fidelity Bond?” surety.org
4. 40 U.S.C. § 3131, Bonds of contractors of public buildings or works (Cornell LII). law.cornell.edu
5. 40 U.S.C. § 3133, Rights of persons furnishing labor or material (Cornell LII). law.cornell.edu
6. FAR 28.102-1, General (FAC 2026-01, effective 03/13/2026). acquisition.gov
7. FAR 28.102-2, Amount required (FAC 2026-01). acquisition.gov
8. FAR 28.101-2, Solicitation provision or contract clause (bid guarantees) (FAC 2026-01). acquisition.gov
9. FAR 28.202, Acceptability of corporate sureties (FAC 2026-01). acquisition.gov
10. Bureau of the Fiscal Service, U.S. Treasury, “Circular 570.” fiscal.treasury.gov
11. U.S. Small Business Administration, “Surety bonds” (Surety Bond Guarantee Program). sba.gov
12. Contractors State License Board (CSLB), “Bond Requirements.” cslb.ca.gov
13. CSLB, “Bond Basics: A Brief Discussion.” cslb.ca.gov
14. CSLB, “Fast Facts: A Guide to Contractor License Bonds: Your Rights as a Consumer” (Rev. 8/2025). cslb.ca.gov
15. CSLB, “How do I find the right licensed contractor?” cslb.ca.gov
16. San Bernardino County Assessor-Recorder-County Clerk, “Notary Public.” arc.sbcounty.gov
17. Texas Secretary of State, “Notary Public.” sos.state.tx.us
18. Texas Department of Insurance, “Frequently Asked Questions: Unlicensed Individuals and Entities Adjusting Claims” (May 2014). tdi.texas.gov
19. Bryant Surety Bonds, “Surety Bond Cost in 2026: Factors and Cost-Saving Tips” (bond seller; checked October 2026). bryantsuretybonds.com
20. Surety Bonds Direct, “Surety Bond Insurance Cost” (bond seller; updated Oct. 24, 2023). suretybondsdirect.com