Best Performance Bonds: 2026

Performance bonds in 2026 remain a cornerstone of risk management in construction and public works, guaranteeing project completion and financial protection for owners. While core principles are stable, California’s Senate Bill 61 (effective January 1, 2026) introduces a pivotal change by capping retention at 5% on private construction contracts, with explicit exceptions for contractors who fail to provide required performance and payment bonds.

This shift will likely increase bonding demand as owners seek alternative security. No major federal bond requirement changes are slated for 2026, making California’s update the key development to navigate. Premiums continue to range from 1-4% of contract value, with underwriting emphasizing financial health and project history.

1. Performance Bond Fundamentals 2026

What is a Performance Bond?

A performance bond is a three-party surety agreement that guarantees a contractor (Principal) will complete a project according to contract terms for the project owner (Obligee). If the contractor defaults, the surety company (Surety) steps in to either complete the work or compensate the owner for losses.

Key distinction from insurance: Insurance covers risks like accidents; a performance bond guarantees contractual fulfillment. It’s a promise, not damage coverage, and involves three parties vs. insurance’s two.

The Three Parties

Obligee: Project owner (government agency, private developer) requiring protection
Principal: Contractor obligated to perform the work
Surety: Bond issuer (bank or specialized surety company) guaranteeing performance

Common Use Cases in 2026

Public construction projects: Federal, state, local government contracts (legal requirement)
Private commercial projects: Factories, office buildings, especially with new contractors
Supply & service contracts: Equipment, materials, specialized services
California telecommunications: All telephone corporations must post continuous $25,000 performance bonds for regulatory compliance

2. 2026 Legal & Regulatory Landscape

Federal Requirements (No 2026 Changes)

The Miller Act mandates performance and payment bonds on federal construction projects exceeding $100,000. Most states have “Little Miller Acts” with similar thresholds ($25,000-$100,000). These remain unchanged in 2026.

California Senate Bill 61: The 2026 Game-Changer

Effective January 1, 2026, SB 61 caps retention on private construction contracts at 5% of each progress payment and total contract price.

Critical Bonding Exception: The 5% cap does not apply to contractors/subcontractors who fail to provide required performance and payment bonds when bonding requirements are given in writing before/at bidding.

2026 Implications:

Increased bonding demand: Owners will require bonds more frequently to retain the 10% risk buffer they previously held via retention
Cash flow vs. cost trade-off: Contractors providing bonds gain 5% better cash flow but pay 1-4% bond premium
Contract updates: All private project templates must be revised for 2026 compliance

Enforcement: Courts must award reasonable attorney’s fees to prevailing parties in disputes, incentivizing strict compliance.

California Telecommunications-Specific Rules

All telephone corporations (CPCN, VoIP, WIR, NDIEC holders) must maintain continuous $25,000 performance bonds filed via Advice Letter by March 31 annually. First-time filers use extension request forms.

3. When Performance Bonds Are Required in 2026

Public Projects (Mandatory)

Federal: Projects >$100,000 (Miller Act)
State/Local: Varies by state; typically >$25,000-$100,000
Bid bonds: Often prerequisite to performance bond; guarantees bid validity

Private Projects (Increasingly Common)

Private owners require bonds for:

Large-scale projects: Factories, office towers where failure is costly
Unknown contractors: New or unproven relationships
Post-SB 61 California: Bonding requirement explicitly exempts retention cap, making bonds more attractive to owners

Project Thresholds & Bond Amounts

Standard: 100% of contract value
California: For bonds >$400,000, contractors must provide balance sheet, income statement, cash flow, disclosures, and work schedules
General industry: Projects >$750,000 typically trigger more stringent underwriting

4. 2026 Costs, Premiums & Underwriting

Premium Rates

Performance bonds cost 1% to 4% of the total contract amount. Key factors:

Contractor credit score: Higher score = lower premium
Financial strength: Balance sheet health, cash flow
Performance history: Track record of on-time, on-budget completion
Project size & complexity: Larger projects = higher risk = higher premium
Length of operation: Established contractors (5+ years) receive better terms

Underwriting Requirements (2026 Standards)

To apply, contractors need:

Year-end financial statements: Prepared by construction-savvy CPA (required for bonds >$400k in CA)
Payables/receivables listing: Current cash flow position
Bank reference letter: Creditworthiness confirmation
Personal financial statements: Of main shareholders
Contractor questionnaire: Project history, resumes, work schedules
Work schedules: Demonstrate capacity to handle bonded project
Tax returns: Business and personal

2026 tip: Work with a construction-specialized CPA to present financials properly—this significantly improves approval odds and lowers premiums.

Payment & Performance Bond Bundling

Most public projects require both bonds. Issued together, they ensure:

Work gets done (performance bond)
Everyone gets paid (payment bond)

Combined cost: Still 1-4% of contract value; often cheaper than separate bonds.

5. The Bonding Process: Step-by-Step 2026

Step 1: Pre-Qualification

Assess bondability: Does your financial profile meet surety standards?
Work with surety agent early, ideally during bidding phase
Obtain bid bond first (often prerequisite)

Step 2: Gather Documentation

Compile financials (see underwriting list above)
Prepare project details: scope, timeline, budget, work schedule
For California SB 61 compliance: Ensure bond requirements are in writing before bidding to retain retention cap benefits

Step 3: Submit Application

Apply through licensed surety bond agency (most offer online applications with soft credit pull)
For large projects (>$750k), expect 5-10 business day review

Step 4: Underwriting Review

Surety evaluates: financial capacity, experience, project risk
May require additional collateral for high-risk applicants
Soft credit pull does not impact credit score

Step 5: Pay Premium & Issue Bond

Pay 1-4% premium upon approval
Bond issued and filed with project owner before work begins
100% money-back guarantee: If bond isn’t accepted, premium refunded

Step 6: Submit to Obligee

Provide finalized bond to project owner (legal requirement on public projects)
For California telecom: File via Advice Letter by March 31 annually

6. Claims, Defaults & Surety Response

What Triggers a Claim?

Contractor bankruptcy/insolvency
Failure to meet deadlines or quality standards
Abandonment of project
Non-payment of subcontractors (payment bond claim)

Surety’s Options When Contractor Defaults

Finance the Principal: Lend money to contractor to complete work
Tender a New Contractor: Hire replacement contractor to finish project
Obligee Completion: Pay obligee to complete work themselves
Obligee Purchase: Bond payout to compensate for losses

Contractor’s Obligation to Surety

Indemnification: Contractor must repay surety for any claims paid out
Bankruptcy doesn’t erase debt: Surety claims survive bankruptcy proceedings
Loss of bonding capacity: Default makes future bonds difficult/expensive to obtain

Claim Process Timeline

Obligee notifies surety of default (must be legitimate, not performance disputes)
Surety investigates (30-60 days)
Remedy executed per bond terms
Surety pursues indemnification from contractor

7. Performance Bonds vs. Alternatives in 2026

Bonds vs. Retention (Post-SB 61)

Feature	Performance Bond	Retention (2026 CA)
Cost	1-4% premium (one-time)	5% withheld from payments
Cash Flow Impact	Immediate premium payment	Gradual withholding, released at completion
Owner Risk	Transferred to surety	Owner holds funds, liable for return
California 2026	May be required to avoid retention cap	Capped at 5% if bonds provided
Speed	Immediate project security	Delays final payment to contractor

SB 61 Impact: Owners may prefer bonds to retain 10% security while contractors benefit from 5% better cash flow.

Alternatives to Performance Bonds

Letters of Credit (LOC): Bank guarantee; ties up credit line; cost 1-3% annually
Cash Retention: Owner holds cash; cash flow burden on contractor
Self-Insurance: Only viable for very large, financially strong contractors
Joint Checks: Owner pays subs directly; reduces payment bond need

2026 trend: SB 61 makes bonds more attractive to California owners seeking security beyond 5% retention.

8. 2026 Trends & Strategic Considerations

1. Increased Private Project Bonding

California SB 61 will drive demand for performance bonds on private projects as owners replace lost retention security. Expect 20-30% increase in private bond issuance in California.

2. Technology-Enhanced Underwriting

Sureties increasingly use:

AI-driven risk assessment: Analyzing contractor financials and project data faster
Real-time project monitoring: IoT sensors, project management API feeds
Digital bond issuance: Reducing issuance time from days to hours

3. Sustainability & ESG Factors

Projects with strong ESG profiles (green building, local hiring) may receive premium discounts as sureties view them as lower risk. Conversely, high-carbon projects face scrutiny.

4. Subcontractor Bonding Pressure

With SB 61’s bond exception, general contractors will require subs to provide bonds to avoid losing retention cap protection. Tier-2/3 subs may struggle to qualify.

5. Claims Transparency

Surety industry moving toward open claims databases to help owners evaluate contractor bond histories before awarding contracts.

9. Industry-Specific Requirements

Construction (Primary Market)

Miller Act (federal) and state Little Miller Acts govern public projects
Standard bond amount: 100% of contract value
Typical premium: 1-4%
California 2026: SB 61 creates bonding incentive on private projects

California Telecommunications

All telephone corporations must post $25,000 continuous performance bond per Utility ID
Annual filing: Advice Letter due March 31 each year
Purpose: Guarantee payment of fines, fees, taxes, penalties, restitution

Supply & Service Contracts

Performance bonds guarantee delivery of materials/equipment according to contract terms
Payment bonds ensure suppliers are compensated
Common in: Manufacturing, energy, large equipment procurement

10. Actionable Recommendations for 2026

For Contractors

Pre-Qualify Early: Establish surety relationship before bidding; get bid bonds lined up
California Compliance: For private projects starting 2026, provide bonds to secure 5% retention cap advantage. Ensure bond requirements are in writing pre-bid
Financial Housekeeping: Work with construction CPA to prepare statements that meet surety standards, especially for bonds >$400k in CA
Credit Monitoring: Maintain strong credit; soft pulls during bonding don’t hurt score but determine premium
Bundle Bonds: Get performance + payment bond together for better rates

For Project Owners & Developers

Update Contracts: Revise private project templates to include bond requirements post-SB 61 to maintain security levels
Bond Verification: Confirm bonds are filed timely (California telecom: March 31 deadline)
Alternative Security: If contractor can’t bond, consider LOC or enhanced retention (but capped at 5% in CA if bonds offered)
Claims Preparedness: Understand claim triggers; maintain proper documentation of default vs. performance dispute

For California Stakeholders

Immediate Actions:

Review all private construction contracts executed after Jan 1, 2026 for SB 61 compliance
Implement bond requirement protocols in writing before bidding to retain retention cap flexibility
Annual telecom bonds: File Advice Letter by March 31 with CPUC
Legal counsel: Consult on attorney’s fees provision—prevailing party in disputes recovers fees

Conclusion: Performance Bonds in 2026

The performance bond landscape in 2026 is characterized by stability at the federal level and significant state-level evolution in California. While the fundamental mechanics—three-party guarantee, 1-4% premiums, underwriting based on financial strength—remain unchanged, SB 61’s retention cap creates a new strategic calculus for private construction projects.

Key Takeaways:

California is the 2026 epicenter: Bonding becomes more valuable as owners seek security beyond 5% retention
Cash flow vs. cost trade-off: Contractors must decide between paying 1-4% premium vs. losing 5% retention
No major federal changes: Miller Act thresholds and processes remain stable
Technology integration: Digital underwriting and claims tracking are modernizing the industry

Final Action: California contractors and owners must immediately update contracts and bidding processes to reflect SB 61. All other stakeholders should treat 2026 as a business-as-usual year but monitor for similar retention-limiting legislation in other states, as California often sets regulatory trends.

For non-California businesses: The time to review bonding capacity and surety relationships is now—if similar laws spread, demand for private project bonds will surge, potentially straining underwriter capacity and increasing premiums.

Performance Bonds: The 2026 Complete Guide