Bonds are required for any contract or job over $100,000 as the result of legislation set forth in the Miller Act of 1935 and amended by the Federal Acquisition Streamlining Act of 1994. The Miller Act stipulates that contractors must furnish surety bonds for all federal construction contracts up to $100,000 just as with other non-governmental contracts. The amount of the bond must be satisfactory to the contracting officer. A payment bond for a penal sum up to $2.5 million and several different types of surety bonds are required for federal contracts.
Bid guarantees are usually purchased as a bond which ensures that the contractor will enter into the contract agreed upon and provide the required payment and performance bonds. A payment bond guarantees that the contractor will pay subcontractors who provide labor, materials, equipment or supplies during the project. Generally, payment bonds are 100% of the cost of the contract, and changes if the contract value changes. The penal amount of the payment bond must be a maximum of $2.5 million where the contract price is more than $5 million, and for contracts less than $5 million, the penal sum of the payment bond is required to be forty to fifty percent of the contract price. A performance bond ensures that the contractor will perform the contract in accordance with its terms.