How does a performance bond work?

Complete Guide to How Performance Bonds Work

Why This Question Matters for Colorado and Utah Residents

Performance bonds are a core requirement for many public and private construction projects in Colorado and Utah. Understanding how they work is essential both for compliance and for protecting your business and reputation against costly setbacks.

• Regulatory compliance: In Colorado, performance bonds are mandatory for all state construction contracts above $50,000. Missing this requirement can disqualify your bid or halt your project entirely.
• Regional risk factors: Northern Colorado experiences a 53% higher rate of performance bond claims during hail and severe weather seasons, affecting timelines and claim likelihood for local contractors.
• Financial safeguard: Performance bonds provide a structured way to resolve project failures—claim payouts average $67,000 but can reach over $200,000 on mid-sized contracts, protecting both developers and contractors.

What Most People Get Wrong

Many business owners assume performance bonds only benefit the client or government—they don’t realize a bond actually streamlines claim resolutions and protects the contractor’s reputation by keeping projects moving. Another common misconception is that all you need is the minimum required bond, but regional risks or higher-value projects may demand greater coverage to avoid out-of-pocket costs.

It’s also easy to underestimate how claims work. For example, claim resolution for bonded projects in Colorado is typically 45 days faster than relying on court litigation alone—an advantage when every day counts.

The Complete Picture

A performance bond is a three-party agreement: your business (the principal), your client (the obligee), and the surety company (the guarantor). If your business fails to complete the contract as specified—for any reason, from subcontractor default (42% of claims) to material failures—the surety will pay the client or hire a contractor to finish the job, up to the bond amount.

Bonds aren’t insurance in the traditional sense. If a claim is paid, the surety will seek reimbursement from your business. Premiums in Colorado and Utah typically range from 0.5%–3% of the bond amount, with higher rates for those with poor credit or limited history. In Northern Colorado, contractors may face higher claims in spring and summer due to storm delays, making proper bond sizing especially important.

Digital applications and partnerships now allow some businesses to secure necessary bonds in as little as 48 hours, allowing you to seize contract opportunities quickly while ensuring compliance with both state and local regulations.

Making the Right Decision for Colorado and Utah Residents

Question 1: What are your project’s bond requirements and risks?

Before bidding, research local and state minimum bond requirements. Consider:

• CO mandates performance bonds for public projects over $50,000; some cities like Denver require $50,000 minimum plus potential compliance riders.
• Weather risks in Northern Colorado (hail, storms) increase claim likelihood and may warrant a higher bond.

Question 2: Can your business handle the financial responsibility of potential claims?

Understand how much risk you’re absorbing. For example, if a subcontractor defaults, will you be able to repay the surety if a claim is paid? Consider the following:

• Contractors with excellent credit may qualify for rates as low as 0.5% of the bond value; challenged credit can mean up to 20%.
• Surety claims must be reimbursed—budget for this potential liability rather than assuming it's “free money.”

Question 3: Are you planning for your business to grow?

As you take on larger projects, your required bonding capacity will increase. Plan ahead by:

• Maintaining strong relationships with surety providers to expand your bond size as your track record grows.
• Working with local bond specialists who understand CO and UT nuances, so your bond program matches your evolving business needs.