Surety Bonds for the Construction Industry
The guide to the surety bonds a contractor needs across a construction project — from tender to handover. Bid bond, advance payment bond, performance bond and retention bond, accepted in public and private works.
A contractor needs different bonds across a project: a bid bond at tender (the offer), an advance payment bond at mobilisation, a performance bond during execution (completion) and a retention bond at handover (defects). All of them replace cash collateral, freeing working capital without consuming the bank credit line.
Key facts
- Bid bond (tender): Required at the proposal stage; guarantees the winner will sign the contract. Accepted under Brazilian Law 14.133/2021.
- Advance payment bond: Required at mobilisation; protects the advance paid to the contractor before works begin.
- Performance bond (execution): In force during the works; guarantees completion per the contract — the most common bond in construction.
- Retention bond (handover): Replaces cash retention in the defects period, releasing the 3% to 10% held back to the contractor.
- Frees working capital: The insurer's guarantee removes the need to tie up cash or a bank line — capital stays free to run the works.
- Public works (Law 14.133): The surety bond is accepted at bid and execution, with a 5% limit (up to 30% for large works with the step-in clause).
Bond by project phase
| Bond | What it secures | Typical amount |
|---|---|---|
| Bid bond (tender) | That the winner signs the contract and provides the performance guarantee | 1% to 5% of the estimated value |
| Advance payment bond | The return of the advance if the contractor fails to perform | Up to 100% of the advance |
| Performance bond (execution) | Completion of the works per schedule, scope and quality | 5% to 30% of the contract value |
| Retention bond (handover) | Correction of defects in the warranty period, in lieu of retention | 3% to 10% of the contract value |
Bonds across the project lifecycle
A construction project moves through well-defined phases, and each phase carries a different risk for the party that hires the works. The construction industry addresses those risks with a sequence of bonds that follow the programme — starting before the works exist and ending after handover.
At tender, the bid bond guarantees the winning bidder will honour its offer, sign the contract and provide the performance guarantee. Without it, the employer would risk the winner walking away and having to re-run the whole procurement. See the detail on our bid bond page.
At mobilisation, when there is an advance payment for materials or setting up the site, the advance payment bond protects that money: if the contractor fails to perform, the advance is returned. During execution, the performance bond guarantees the works will be completed per the contract. At handover, the retention bond replaces the classic cash retention to cover defects in the warranty period.
Replacing each of these deposits with an insurer's bond has a direct effect on cash: instead of tying up money or a bank line at every phase, the contractor keeps working capital free to run the works — meeting payroll, buying materials and holding the schedule.
Public works (Law 14.133)
In public works, Brazilian Law 14.133/2021 (the new Public Procurement Law) expressly provides for the surety bond both as a bid guarantee (bid bond) and as a contractual performance guarantee (performance bond). The contractor can offer the policy in place of cash collateral, a bond note or a bank guarantee.
The general limit for the performance guarantee is 5% of the contract value. For large engineering works, the tender may require up to 30%, provided it adopts the step-in clause — under which the insurer takes over completion of the works in case of default. We break down the rules on our page about the surety bond and Law 14.133.
The advantage for the contractor is preserving capital: instead of leaving 5% (or more) of the contract parked as collateral, the policy covers the tender requirement for a premium that is a fraction of that value, keeping cash available for the works themselves.
Private works
In private works — developments, industrial plants, EPC contracts and sub-contracts — the bonds are not imposed by law but by negotiation between the parties. The private employer typically requires a performance bond to protect against non-completion, and an advance payment bond when it makes upfront payments.
The structure is the same as public works: the contractor (principal) buys the policy, the insurer guarantees the employer (obligee/beneficiary) that the obligation will be met, and the cost is a fraction of the bonded amount. The difference between guaranteeing completion of the works and guaranteeing payment to subcontractors and suppliers is explained in our performance bond vs payment bond comparison.
For the contractor, using a surety bond instead of a bank guarantee in private works avoids consuming the bank credit line — which stays free to finance working capital, equipment and new work fronts.
How to obtain one
The process starts with a risk analysis of the contractor (principal): the insurer assesses technical capacity, financial standing and track record. Once approved, the bonded amount, term and type (bid, advance payment, performance or retention) are defined, and the policy is issued — usually within 24 to 72 hours.
The best approach is to map every phase of the project at the outset and arrange the bonds in a coordinated way, avoiding timing surprises when signing the contract or receiving the advance. ERGO structures the bond package for the whole project, aligned with the tender or the private contract.
Request a quote with the contract value and the project phase, and ERGO will indicate the type and estimated cost for each bond you need.
Frequently asked questions
Which bonds do I need for a public works project?
At the tender stage, the bid bond. After winning, the contractual performance guarantee (performance bond), capped at 5% of the contract — up to 30% for large works with the step-in clause. If there is an advance, also an advance payment bond. All are provided for under Brazilian Law 14.133/2021.
Is a performance bond mandatory in construction?
In public works, the performance guarantee is a tender requirement under Law 14.133/2021, and the performance bond (surety bond) is one of the accepted forms. In private works it is not mandatory by law, but it is commonly required by the employer in the contract to protect completion.
Does the bond replace cash collateral?
Yes. Instead of tying up 5% (or more) of the contract value as collateral, a bond note or a deposit, the contractor offers the surety bond policy, paying only the premium (a fraction of the bonded amount). Working capital stays free for the works.
How much does a construction bond cost?
The premium usually ranges from 0.5% to 5% per year on the bonded amount, depending on the type, term and the contractor's risk analysis. A contract bonded at R$1,000,000 for one year at 2%, for example, would cost around R$20,000.
What is a retention bond in construction?
It is the bond that replaces the cash retention the employer holds at handover to cover defects in the warranty period. With a retention bond, the contractor is paid in full and the insurer guarantees the 3% to 10% that would otherwise be held back, freeing cash flow.
Do I have to arrange all the bonds at once?
No. Each bond follows its phase: the bid bond at tender, the advance payment bond at mobilisation, the performance bond during execution and the retention bond at handover. Even so, it is best to plan them all at the outset so no bond is missing when signing the contract or receiving the advance.
Need bonds for your construction project?
ERGO structures bid bonds, advance payment bonds, performance bonds and retention bonds for public and private works — preserving your working capital.