When and How to Use Performance Bonds in Construction Contracts

In construction, deadlines matter, and so does quality. And when projects fall apart, whether due to a contractor walking off the job or failing to meet contract terms, the financial and legal consequences can be significant. That’s where performance bonds come in. 

Whether you’re a property owner, contractor, or developer, understanding when and how to use performance bonds in Florida construction contracts can help you avoid financial loss and legal headaches.

What Is a Performance Bond in Construction?

A performance bond is a type of surety bond used in construction contracts. It provides a financial guarantee that the contractor will complete the project according to the agreed-upon terms. If the contractor fails to perform, the bond ensures the project owner (also known as the obligee) has recourse, usually through the surety company that issued the bond.In short, a performance bond protects the project owner if the contractor doesn’t deliver.

When Is a Performance Bond Required in Florida?

Performance bonds are commonly required in both public and private construction projects—but the rules vary.

Public Projects

Under Florida law, performance bonds are required for most public construction projects over $200,000. This is mandated by Florida’s version of the Little Miller Act, which mirrors the federal Miller Act. The bond protects public entities (like state agencies or school boards) from contractor default.

Private Projects

In private projects, performance bonds are not automatically required but are often used when:

• The project involves substantial costs or long timelines
• The owner wants protection against contractor failure
• The lender or financing institution requires it

What Does a Performance Bond Cover?

A performance bond typically covers:

• Failure to complete the work
• Failure to meet quality or timeline standards
• Contractor default, bankruptcy, or abandonment
• Costs of hiring another contractor to finish the job

However, it’s important to understand that performance bonds are not blanket insurance policies. They only cover the specific risks outlined in the bond and the underlying contract.

How Does a Performance Bond Work?

Here’s how the process unfolds:

1. Bond Issuance: A surety company issues the bond on behalf of the contractor (the principal). The bond is typically in the amount of the full contract value.
   
2. Breach or Default Occurs: If the contractor fails to perform according to the contract, the project owner can make a claim on the bond.
   
3. Surety Investigation: The surety company investigates the claim. If it’s valid, the surety may:
   • Pay the bond amount to the project owner
   • Hire another contractor to complete the work
   • Work with the original contractor to correct the problem
4. Surety Seeks Reimbursement: The surety will typically seek repayment from the original contractor, and the contractor remains liable for the default.

Who Pays for the Performance Bond?

The contractor (not the owner) typically pays for the performance bond as part of the project costs. It’s similar to an insurance premium and is based on the project size and the contractor’s creditworthiness.

Why Use a Performance Bond in Construction?

If you’re wondering if requiring a performance bond is worth it, here are a few reasons why it might be the right move:

• Risk Management: Construction is unpredictable. A performance bond adds a layer of financial security.
• Credibility Check: Reputable contractors who can qualify for a performance bond are more likely to be reliable.
• Project Continuity: If the contractor defaults, the bond ensures the project can move forward with minimal disruption.
• Financial Protection: Especially on larger projects, it ensures the owner doesn’t bear the cost of someone else’s failure.

What Happens If a Contractor Defaults and You Have a Performance Bond?

If the contractor walks off the job or fails to perform:

1. You file a formal claim with the surety.
2. The surety investigates and confirms whether the claim is valid.
3. You may receive compensation, or the surety may step in to complete the project.

Important: Your contract must be well-drafted. If the construction agreement is vague or poorly written, it may affect your ability to enforce the bond.

Common Issues with Performance Bonds in Florida

1. Denied Claims

Sureties don’t pay out automatically. You must prove the contractor breached the contract. This is where having experienced legal counsel is critical.

2. Delay Tactics

Surety companies may delay their investigation, especially if the contract language is unclear or the facts are disputed.

3. Incomplete or Invalid Bonds

Not all bonds are created equal. If your bond is missing key terms or wasn’t executed correctly, it may be unenforceable.

When to Consult a Construction Litigation Attorney

You should speak with an attorney if:

• You’re drafting a construction contract and want to include a performance bond
• You’re facing contractor delays or abandonment
• You need to file a performance bond claim
• You’re unsure if the bond is enforceable

At Ayala Law, we routinely assist contractors, property owners, and developers in navigating construction disputes, including issues related to performance bonds. We understand the practical and legal stakes, and we help clients enforce their rights with precision and strategy.

Final Thoughts: Performance Bonds as Smart Risk Protection

Performance bonds may not prevent every construction issue, but they are one of the most effective tools available for minimizing risk and holding contractors accountable. 

If you’re involved in a construction project where deadlines, quality, and financial stakes matter, contact one of our experienced business attorneys in Miami at 305-570-2208.

You can also contact trial attorney Eduardo A. Maura at eduardo@ayalalawpa.com.

Schedule a case evaluation online here.