Construction · Insurance Term
Performance Bond
Definition
A performance bond is a guarantee, issued by a surety company, that a contractor will finish a construction project according to the contract. If the contractor defaults, the surety steps in to complete the work or pay the owner, up to the bond amount.
In Plain English
A performance bond is a type of surety bond, which is a three-party arrangement. The contractor (the principal) buys the bond. The project owner (the obligee) is the one protected. The surety backs the promise and expects the contractor to repay any losses.
It is not insurance for the contractor. If the surety pays, it will pursue the contractor to recover its money. That is why sureties look closely at a contractor's finances, experience and workload before issuing a bond.
A performance bond is often paired with a payment bond, which protects subcontractors and suppliers who don't get paid. Together they help keep a project moving if the contractor runs into trouble.
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Example
Hypothetical and simplified: an owner hires a contractor to build a $3 million medical office, with a performance bond equal to the contract price. Halfway through, the contractor goes out of business. The surety investigates and may hire a new contractor to finish, or pay the owner's extra cost to complete, up to $3 million.
Why It Matters for Texas Property Owners
On Texas public work, state law requires a governmental entity to get a performance bond from the prime contractor on construction contracts over $100,000 (Gov't Code §2253.021). On private projects, bonds are a matter of contract and are often requested by owners or lenders on larger builds. For how a bond interacts with Texas lien rules on your project, ask a Texas construction attorney.
What to Watch For
- Check that the bond amount matches the final contract price, including approved change orders.
- Confirm that you, and your lender if required, are named as obligee.
- Verify that the surety is authorized in Texas through the Texas Department of Insurance.
- Read the default steps: what notice you must give before the surety has to act.
Sources
Last updated October 14, 2026 · Primesure editorial team · How We Write