Virginia Payment and Performance Bonds

What are Virginia payment and performance bonds?

Virginia 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 perform the contract in strict conformity with its plans, specifications and conditions. The payment bond guarantees that subcontractors, laborers and suppliers who furnish labor or materials to the job will be paid.

Under the Virginia Public Procurement Act (Va. Code § 2.2-4337), contractors must furnish both bonds, each equal to the contract amount, on nontransportation public construction contracts over $500,000 and state-funded transportation projects over $350,000. 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, VDOT, a county, city, town, school board or private owner. The two bonds are usually issued together for a single premium.

Key facts

Who needs Virginia payment and performance bonds?

Any contractor that wins a Virginia public construction contract over the statutory thresholds must furnish payment and performance bonds. That includes work for state agencies and institutions such as the Department of General Services and public universities, VDOT, counties, cities, towns, school boards, and authorities and other public bodies covered by the Virginia Public Procurement Act. Public bodies can also require bonds on smaller contracts, so many localities and school divisions bond jobs well below $500,000.

Private owners, lenders and general contractors also require these bonds by contract on commercial, multifamily and institutional work, and prime contractors may require payment bonds from their subcontractors. The two bonds protect different people:

The bid documents control each project. Public bodies can require bonds below the thresholds, and private owners set their own amounts and forms. Contractors and agents should read the solicitation before quoting.

What makes Virginia's bonds different

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

• Two thresholds, by project type. Bonds are required on nontransportation construction over $500,000 and on state-funded transportation projects over $350,000. A $400,000 road job may need bonds when a $400,000 building job doesn't, unless the owner requires them anyway.
• Bid bond losses are capped. A bid bond can't exceed 5% of the bid, and if the low bidder walks away, the forfeiture is limited to the lesser of the bond amount or the difference between its bid and the next low bid. That makes Virginia bid bonds easier to write than in many states.
• The contractor picks the surety. Bonds are executed by one or more surety companies selected by the contractor, as long as they are authorized to do business in Virginia. The public body can't dictate the surety.
• Localities can bond IDIQ contracts by task. Since 2023, a locality may adopt an ordinance letting contractors on indefinite delivery or quantity contracts furnish performance and payment bonds equal to each individual task, instead of the full contract amount. That makes term and on-call contracts easier to bond.
• Retainage is a flat 5%. On public construction contracts with progress payments, the contractor must be paid at least 95% of the earned amount, so retainage can't exceed 5%. The same limit applies to subcontracts on public projects.
• Pay-if-paid is barred. Public contracts must state that payment by the owner is not a condition precedent to paying lower-tier subcontractors. Contractors must pay subcontractors their share within 7 days of receiving payment, or notify them in writing of any withholding, and owe interest of 1% per month on late payments.
• Retainage claims skip the 90-day notice. Claimants without a direct contract with the prime must give notice within 90 days of last furnishing, but claims for retainage are not subject to that deadline.
• Bond waivers must come after the work. A waiver of the right to sue on the payment bond is void unless it is in writing, signed by the claimant and signed after the claimant has performed labor or furnished materials. Advance waivers in subcontracts don't work.

Bond requirements by project owner

The Virginia Public Procurement Act sets the same bond rules for state agencies and local public bodies, with a lower threshold for state-funded transportation work. Owners can require bonds on smaller contracts in their bid documents.

Public bodies may require bid, performance and payment bonds on contracts below the statutory thresholds, and bid security is set in each solicitation up to the 5% cap. 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 Virginia job as it comes.

How much do Virginia payment and performance bonds cost?

Virginia 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 Virginia payment and performance bonds

1. Read the bid documents. Confirm whether bonds are required at the contract value, the bond forms and whether the project is a transportation project with the lower $350,000 threshold.
2. Line up the bid bond. If the job requires bid security, get the bid bond before bid day. Virginia caps bid bonds at 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 public body's name, the contract or project 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. File the original performance and payment bonds with the public body that awarded the contract, or the office it designates. Keep a copy, since subcontractors and suppliers may ask for it.
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 filing

Virginia doesn't prescribe a single statewide form. State agencies and institutions use the forms in their contract documents, with bonds payable to the Commonwealth of Virginia and naming the agency or institution. Bonds for other public bodies are payable to that public body. Every bond is filed with the public body that awarded the contract or a designated office or official.

Surety requirements

Each bond must be executed by one or more surety companies selected by the contractor and authorized to do business in Virginia. Public bodies often add a minimum A.M. Best rating or Treasury listing requirement in their bid documents, so agents should check the solicitation before placing the bond.

Subcontractor bonds

A prime contractor may require each subcontractor to furnish a payment bond equal to the full subcontract amount. That bond protects the subcontractor's own suppliers and lower-tier subcontractors who furnish labor or materials for the subcontracted work.

Indefinite delivery or quantity contracts

A locality may adopt an ordinance allowing contractors on indefinite delivery or quantity contracts to furnish performance and payment bonds equal to the dollar amount of each individual task, rather than the full contract. These contracts require work only when the locality requests it and set an annual cap on the total work that can be authorized.

Retainage and prompt payment

Public construction contracts may withhold no more than 5% of each progress payment, and the same limit applies to subcontracts. State agency and local government contracts must require the prime contractor to pay subcontractors within 7 days of receiving payment or give written notice of any withholding, with interest of 1% per month on late payments. Payment by the owner can't be a condition precedent to paying lower-tier subcontractors.

Private projects and mechanics' liens

Virginia doesn't require bonds on private projects, but owners and lenders often require them by contract, and the bond's own terms set the claim rules. On private jobs, a recorded mechanics' lien can be released by posting a bond with the court, which moves the claim from the property to the bond. In a suit on that bond, both the surety and the bond principal must be named.

Claims: what the bonds cover

• Who can claim on the performance bond: the public body named as obligee, after declaring the contractor in default
• Who can claim on the payment bond: anyone who performed labor or furnished materials to the prime contractor or any subcontractor in furtherance of the work and was not paid in full
• Direct claimants: a subcontractor or supplier with a contract with the prime contractor may sue on the bond once 90 days have passed since its last labor or delivery, with no prior notice required. The public body doesn't need to be a party
• Notice for remote claimants: a claimant with a contract only with a subcontractor must give the prime contractor written notice within 90 days of its last labor or delivery, stating the amount claimed and the party it supplied. Notice goes by registered or certified mail to the contractor's regular office
• Retainage: claims for retainage are not subject to the 90-day notice deadline
• Deadline: suit must be filed within one year after the day the claimant last performed labor or furnished materials
• Waivers: a waiver of the right to sue on the bond is void unless it is in writing, signed by the claimant, and signed after the claimant performed work or furnished materials
• 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

• Va. Code § 2.2-4337 — Performance and payment bonds
• Va. Code § 2.2-4336 — Bid bonds; construction contracts
• Va. Code § 2.2-4341 — Actions on payment bonds
• Va. Code § 2.2-4333 — Retainage on construction contracts
• Va. Code § 2.2-4354 — Payment clauses to be included in contracts
• HB 1490 (2023) — Bonds on indefinite delivery or quantity contracts
• Cohen Seglias — Virginia shortens notice on public payment bond claims