Texas Payment and Performance Bonds

What are Texas payment and performance bonds?

Texas payment and performance bonds are two contract surety bonds that a contractor posts after winning a construction job. The performance bond guarantees that the contractor will finish the work according to the plans, specifications and contract. The payment bond guarantees that subcontractors and suppliers who furnish labor and material to the job will be paid. 

Under Texas Government Code Chapter 2253, often called the Texas Little Miller Act, a public owner must require a performance bond on contracts over $100,000 and a payment bond on contracts over $25,000 ($50,000 for cities), each in the full contract amount. Each bond involves three parties: the contractor (the principal), the surety that issues the bond, and the project owner (the obligee), such as a state agency, county, city, school district or private owner. The two bonds are usually issued together for a single premium.

Key facts

Who needs Texas payment and performance bonds?

Any contractor that wins a Texas public work contract above the Chapter 2253 thresholds must post the bonds before starting work. That includes work for state agencies and universities, TxDOT, counties, cities, school districts, community college districts, hospital districts, water districts, river authorities and other political subdivisions. Contracts between $25,000 and $100,000 usually need only a payment bond under state law, though owners can require a performance bond in the bid documents.

Private owners, lenders and general contractors also require these bonds by contract on commercial, multifamily and industrial work, and generals often require them from their larger subcontractors. The two bonds protect different people:

The bid documents control each project. Owners can require bonds on smaller contracts or above the statutory minimums, and private owners set their own amounts and forms. Contractors and agents should read the solicitation before quoting.

What makes Texas's bonds different

Texas's bond rules differ from most states in a few ways agents and contractors should know before quoting.

• Two bonds, two thresholds. The performance bond starts above $100,000, but the payment bond starts above $25,000. A Texas public job between $25,000 and $100,000 often needs only a payment bond.
• Cities get a higher payment bond threshold. Cities and joint airport boards require a payment bond only on contracts over $50,000. Counties, school districts, state agencies and other entities use $25,000.
• Large bonds may need a Treasury-listed surety. On any bond over $100,000, the surety must hold a U.S. Treasury certificate of authority or reinsure its liability over $1 million with a reinsurer that is authorized in Texas or Treasury-listed. Smaller and regional sureties need that reinsurance in place before writing larger Texas jobs.
• Coverage stops at the second tier. The payment bond protects only claimants with a direct contract with the prime contractor or with one of its subcontractors. A supplier to a supplier, or a third-tier subcontractor, has no claim on the bond.
• Failing to obtain a bond puts the owner on the hook. If a public owner fails to obtain a required payment bond, it takes on the same liability the surety would have had to unpaid subcontractors and suppliers.
• Project owners can't pick the surety or agent. A governmental entity may not require a contractor to get its bond from a particular surety company, agent or broker.
• Pay-if-paid clauses are allowed, with limits. Unlike many states, Texas lets contingent payment clauses be enforced. A subcontractor can stop enforcement by sending a written objection after an invoice goes unpaid for 45 days, and a clause can't be enforced if doing so would be unconscionable.
• Retainage depends on contract size. Public owners may hold back up to 10% on contracts under $5 million and up to 5% on contracts of $5 million or more, and a prime contractor can't withhold a higher percentage from its subcontractors.

Bond requirements by project owner

Chapter 2253 sets the baseline for every Texas governmental entity. County and city purchasing statutes add bid bond and performance bond rules on top, and TxDOT has its own rules for design-build and development agreements.

Cities must have contractor bonds executed under Chapter 2253 by a surety authorized in Texas, and many cities, school districts and special districts require a 5% bid bond in their bid documents. Check the bid documents for each project.

Circle Surety's contract bond program gives contractors an instant program approval. Bid, performance and payment bonds for individual jobs are then issued under that approval in minutes. Agents can set up contract bond capacity for a client once and bond each new Texas job as it comes.

How much do Texas payment and performance bonds cost?

Texas payment and performance bond premiums are typically calculated on a sliding scale, where the rate steps down as the contract amount grows. In the example below, the rate starts at 3% on the first $100,000 of the contract price and steps down to 1% on the portion over $2,500,000, though the tiers and rates usually vary by surety. 

One premium covers both bonds together; the payment bond is usually included at no added cost when it is written with the performance bond. The rates below are a hypothetical example; the actual rate can only be determined after a completed application is received. Premium rates by contract amount:

Estimated one-time premiums for common contract amounts:

Estimates cover the performance and payment bonds together for the life of the contract; minimum premiums vary by surety. Change orders that raise the contract price raise the premium. Contracts over $2,000,000 require additional financial information.

Circle Surety can provide instant quotes for these and many other bonds through our online portal.

How to get Texas payment and performance bonds

1. Read the bid documents. Confirm which bonds are required, the bond forms and the delivery deadline. State contracts use bond forms approved by the Attorney General; other owners name their own.
2. Line up the bid bond. If the job requires bid security, get the bid bond before bid day. Counties and many other owners ask for 5% of the bid.
3. Apply online. Fill out the short form below, as the contractor or on your client's behalf. A soft credit check is required to determine program approval and the final premium.
4. Gather the contract details. After award, provide the contract amount, the owner's name, the project name and number, and the contractor's exact legal name as it appears on the contract.
5. Sign and pay. All contract bonds require a general indemnity agreement signed by the company and its owners. Once it is signed and the premium is paid, the bonds are issued with the surety's power of attorney attached, usually in minutes.
6. Deliver the bonds to the owner. Submit the original performance and payment bonds to the owner before work begins. Keep a copy, since subcontractors and suppliers may ask for one.
7. Report change orders. Notify the surety of change orders that increase the contract amount so the bond amount and premium can be adjusted.

Requirement details

Bond forms and contents

Bonds on state contracts are payable to the State of Texas on a form approved by the Attorney General. Bonds for other governmental entities are payable to and approved by that entity. Every Chapter 2253 bond must clearly show the surety's address for notices and its phone number, or the Texas Department of Insurance toll-free number with a statement that the surety's address can be obtained from TDI. The performance bond is conditioned on faithful performance under the plans, specifications and contract documents.

Surety qualifications

Chapter 2253 bonds must be written by a corporate surety authorized to write surety bonds in Texas. When a bond exceeds $100,000, the surety must also hold a certificate of authority from the U.S. Secretary of the Treasury, or have reinsured any liability over $1 million with a reinsurer that is authorized in Texas or Treasury-listed. The same rule applies to private payment bonds under Property Code Chapter 53.

When bonds must be in place

The prime contractor must execute the bonds before it begins work. On county contracts, a performance bond required under the county purchasing statute must be furnished within 10 days after the contract is signed and before work starts.

Bid security

Counties may require a bid bond of 5% of the total contract price on public works or contracts over $100,000, written by a surety authorized in Texas. Cities, school districts and other owners set bid security in their bid documents, and 5% is the common amount.

Retainage and prompt payment

Public owners may withhold retainage of up to 10% on contracts under $5 million and up to 5% on contracts of $5 million or more, and prime contractors may not withhold a greater percentage from their subcontractors. Under the state prompt payment law, a governmental entity generally pays within 30 days, and a contractor must pay its subcontractors within 10 days after receiving payment. On private projects, owners pay within 35 days of a payment request and contractors pay their subs within 7 days of receiving payment.

Private projects and mechanic's liens

Texas doesn't require bonds on private projects, but a prime contractor can furnish a payment bond under Property Code Chapter 53, Subchapter I. The bond must be at least the full contract amount, run in favor of the owner, carry the owner's written approval, and be recorded with the contract in the county where the project is located. A properly recorded bond shifts claims from the property to the bond, so subcontractors and suppliers can't foreclose liens against the owner's property.

Claims: what the bonds cover

• Who can claim on the performance bond: the governmental entity or owner named as obligee, after declaring the contractor in default. Suit must be filed no later than one year after final completion, abandonment or termination of the contract
• Who can claim on the payment bond: anyone with a direct contract with the prime contractor or with one of its subcontractors who supplied public work labor or material, including specially fabricated material, and was not paid
• Monthly notice: the claimant mails notice with a sworn statement of account to the prime contractor and the surety by the 15th day of the third month after each month in which it performed labor or delivered material
• Early notice for second-tier claimants: a claimant without a direct contract with the prime contractor must also notify the prime contractor by the 15th day of the second month after each month of unpaid work
• Retainage claims: notice of a claim for retainage is due to the prime contractor and surety by the 90th day after final completion of the contract
• Deadline to sue: a claimant may sue if the claim is still unpaid on the 61st day after notice was mailed, and must file no later than one year after the notice was mailed, in a county where any part of the project is located
• Attorney fees: the court may award reasonable attorney fees and costs in a suit on the payment bond
• Limits: a subcontractor's claim can't exceed its share of the subcontract price for work completed, and a retainage claim is capped at the retainage in the contract, never more than 10%
• Copy of the bond: an unpaid claimant who files an affidavit can get a certified copy of the payment bond and contract from the governmental entity for a reasonable fee
• Your obligation: a bond isn't insurance for the contractor. If the surety pays a claim, the contractor and its indemnitors must repay it. Agents should make this clear to clients before issuance

Sources

• Tex. Gov't Code Chapter 2253 — Public work performance and payment bonds
• Tex. Gov't Code § 2253.021 — Performance and payment bonds required
• Tex. Gov't Code Chapter 2253 — Claims, notices and suits (Justia)
• Tex. Ins. Code § 3503.005 — Additional requirements for certain bonds
• Tex. Gov't Code § 2252.032 — Retainage
• Tex. Loc. Gov't Code § 262.032 — County bid and performance bonds
• Tex. Loc. Gov't Code § 252.044 — Municipal contractor's bond
• Tex. Prop. Code § 53.202 — Private payment bond requirements
• Tex. Bus. & Com. Code Chapter 56 — Contingent payment clauses
• TxDOT Local Government Projects — Bid document bonding requirements