Bonding Requirements for Contractors

Federal construction contracts exceeding $150,000 trigger mandatory bonding obligations under the Miller Act (40 U.S.C. §§ 3131–3134), and failure to carry proper bonds disqualifies a contractor from award before a single bid is read. On Guam — where the federal government holds title to substantial land and funds infrastructure through the Department of Defense and civilian agencies — understanding the bonding framework is not administrative background knowledge. It is a prerequisite to working.

What Surety Bonds Actually Are

A surety bond is a three-party agreement: the principal (the contractor), the obligee (the project owner or government agency), and the surety (the bonding company). The surety guarantees to the obligee that the principal will fulfill contractual obligations. If the principal defaults, the surety steps in to complete the work or compensate the obligee — and then seeks reimbursement from the principal.

This is not insurance. Insurance absorbs losses. A surety bond transfers risk temporarily and then recovers it from the contractor. That distinction matters when contractors are evaluating their financial exposure on a defaulted job.

The Three Core Bond Types

Performance Bonds

A performance bond guarantees that the contractor will complete the project according to contract terms. Under FAR Part 28, federal contracting officers require performance bonds at 100% of the contract price for construction contracts above the Miller Act threshold. If the contractor walks off the job or fails to meet specs, the surety funds completion — either by financing the original contractor, hiring a replacement, or paying the obligee up to the bond's penal sum.

Payment Bonds

A payment bond protects subcontractors, laborers, and material suppliers. The Miller Act requires payment bonds at 100% of the contract price on federal jobs over $150,000. On Guam military construction projects — which routinely run into the tens of millions of dollars — payment bond claims from unpaid concrete suppliers or subgrade specialists are legally enforceable against the surety when the prime contractor fails to pay.

Bid Bonds

A bid bond guarantees that if a contractor wins a bid, they will enter into the contract and provide the required performance and payment bonds. The standard bid bond amount is 20% of the bid price (according to the National Association of Surety Bond Producers). A bid bond is not a fee — it is a prequalification mechanism that filters out undercapitalized bidders.

Federal Threshold and the Miller Act Framework

The $150,000 threshold set by the Miller Act is not indexed to inflation automatically. Congress has amended it over time, and the FAR Part 28 implementing regulations define exactly how and when contracting officers must demand bonds. For contracts between $35,000 and $150,000, contracting officers have discretion to require alternative protections such as irrevocable letters of credit or Treasury securities.

The full regulatory text governing these requirements appears in Title 48 of the Electronic Code of Federal Regulations, which covers the Federal Acquisition Regulations System in its entirety.

Surety Eligibility: Treasury Circular 570

Not every bonding company is acceptable on federal contracts. The Treasury Department maintains a listing of certified surety companies under Circular 570, updated annually. Each listed company is assigned underwriting limits per state or territory. Contractors working on Guam federal projects must confirm that their surety carrier appears on the Circular 570 list and is approved to write bonds in the territory — failing that, the bond is invalid for federal procurement purposes.

How Underwriters Evaluate Contractors

Surety underwriters assess three factors, sometimes called the "three Cs": character, capacity, and capital. Character refers to the contractor's track record and reputation. Capacity means the contractor's technical ability and workforce to complete the scope. Capital means financial strength — working capital, net worth, and liquidity ratios.

The Small Business Administration's Surety Bond Guarantee Program exists specifically because smaller contractors often lack the financial history to qualify for bonds on the open market. Under this program, the SBA guarantees between 70% and 90% of the surety's loss on qualifying contracts, allowing participating sureties to bond contractors who would otherwise be turned down. Contract size limits under the SBA program reach up to $9 million for certain contracts, and up to $14 million for contracts deemed to be in the federal government's interest (according to the SBA).

Guam-Specific Considerations

Guam's construction market operates under both local law (the Guam Code Annotated) and federal procurement rules for government contracts. Federal military and civilian contracts on island — including NAVFAC Pacific projects and General Services Administration work — fall squarely under the Miller Act and FAR Part 28. Local private contracts may be governed by different bonding requirements set by the Guam Contractors' Licensing Board (according to the Guam Department of Revenue and Taxation).

Contractors bidding joint ventures on Guam federal work must ensure that bonding capacity is attributed correctly between partners. A joint venture does not automatically inherit the bonding capacity of the larger partner — the surety evaluates the JV entity independently.

Consequences of Bonding Deficiencies

An inadequate or missing bond is grounds for bid rejection and contract termination for cause. The GAO has sustained bid protests where agencies failed to verify bond adequacy before award. Beyond disqualification, a contractor who provides a materially false bond — for example, using a non-listed surety — faces potential liability under the False Claims Act (31 U.S.C. § 3729).

OSHA construction standards do not directly govern bonding, but bonded contractors bear reputational and financial consequences from OSHA citations on federally funded work, since repeat violations can affect surety renewal at the next underwriting cycle.

FAQ

What is the Miller Act threshold for requiring performance and payment bonds?

The Miller Act requires both performance and payment bonds on federal construction contracts exceeding $150,000.

Does the SBA surety bond program cover Guam contractors?

The SBA Surety Bond Guarantee Program is available to small businesses in U.S. territories, including Guam, through participating surety companies listed on the SBA's program page.

How does a contractor verify that their surety is federally approved?

Contractors check the Treasury Department's Circular 570 listing to confirm their surety carrier holds approval to write bonds in the applicable jurisdiction up to the required contract amount.

What happens if a subcontractor is not paid on a Miller Act project?

Unpaid subcontractors and suppliers on federal contracts can file a claim directly against the payment bond. The Miller Act sets a 90-day notice period after last furnishing labor or materials before a claimant may bring suit, with a one-year statute of limitations on payment bond claims.

Can a contractor use a letter of credit instead of a surety bond?

For federal contracts between $35,000 and $150,000, contracting officers may accept alternatives including irrevocable letters of credit under FAR Part 28, but above $150,000 the Miller Act mandates surety bonds from Treasury-approved companies.

References

• Small Business Administration — Surety Bonds
• Federal Acquisition Regulation — Part 28: Bonds and Insurance
• ECFR Title 48 — Federal Acquisition Regulations System
• Miller Act — 40 U.S.C. §§ 3131–3134 (via govinfo.gov)
• OSHA Construction Standards
• National Association of Surety Bond Producers
• U.S. Government Accountability Office — Construction Bonding
• Treasury Department — Listing of Certified Companies (Circular 570)

The law belongs to the people. Georgia v. Public.Resource.Org, 590 U.S. (2020)