Ask a contractor what a performance bond costs and a surprising number will answer with the bond amount. Ask what the bond amount means and you will get a longer pause.
The confusion is not carelessness. It is that one number is doing a job most people assume is done by two.
The definition, which is shorter than you expect
The Federal Acquisition Regulation defines the term in FAR 28.001:
“Penal sum or ‘penal amount’ means the amount of money specified in a bond (or a percentage of the bid price in a bid bond) as the maximum payment for which the surety is obligated or the amount of security required to be pledged to the Government in lieu of a corporate or individual surety for the bond.”
Read what that sentence is about. It is about the surety’s maximum exposure to the obligee. It describes a ceiling on a liability that only ever runs one direction: from the surety, to the party protected by the bond, if the principal fails.
It says nothing about the principal paying anybody. The word premium does not appear in FAR 28.001 at all.
Where the number comes from
On federal construction work the penal sum is not negotiated. FAR 28.102-2(b)(1) sets the performance bond penal amount at
“100 percent of the original contract price”
unless the contracting officer determines a lesser amount is adequate for the protection of the Government. The payment bond carries the same measure under 28.102-2(b)(2), with a floor attached: “The amount of the payment bond must be no less than the amount of the performance bond.”
“Original contract price” is itself defined, at FAR 28.102-2(a) — the award price of the contract, or for requirements contracts the price payable for the estimated total quantity, or for indefinite-quantity contracts the price payable for the specified minimum quantity. It “does not include the price of any options, except those options exercised at the time of contract award.”
That last clause is worth holding on to. A contract with large unexercised options is bonded on the award price, not on its potential value.
The statute and the regulation do not say the same thing
The Miller Act itself is far vaguer. 40 U.S.C. § 3131(b)(1) requires a performance bond “in an amount the officer considers adequate” — no percentage, no formula, nothing to look up.
So the familiar 100 percent of FAR 28.102-2(b)(1) is regulatory, not statutory. Both are binding on a federal job, and a page that prints one while implying it came from the other is printing the right number with the wrong authority.
The percentage is a policy choice, and states chose differently
If the 100 percent of FAR 28.102-2(b)(1) were inherent to the idea of a performance bond, every legislature would have landed there. They did not.
Tennessee requires a bond of “no less than twenty-five percent (25%) of the contract price on all contracts in excess of one hundred thousand dollars ($100,000)” (Tenn. Code § 12-4-201).
Idaho splits the two instruments and fixes the payment bond at an amount “in no event less than eighty-five percent (85%) of the contract amount” (Idaho Code § 54-1926).
Massachusetts requires security by bond “in an amount not less than one half of the total contract price” on contracts over $25,000 (M.G.L. c.149 § 29).
Colorado uses the same fraction, in its own words: a penal sum “not less than one-half of the total amount payable under the terms of the contract” (C.R.S. § 38-26-106).
North Carolina stays at “one hundred percent (100%) of the construction contract amount” for the performance bond (N.C.G.S. § 44A-26).
Four different answers to one question, all currently in force. The penal sum is whatever the governing statute says it is, and “governing” means the statute for the job in front of you.
What decides the other number
Nothing above. The penal sum is a term of the bond; what the principal pays for that bond is a credit decision, made by an underwriter looking at financial statements, work on hand, and the principal’s record. A larger penal sum generally means more exposure and so a larger figure — but the relationship is not a rate card, and two contractors bonded on identical contracts routinely pay different amounts.
That is why a page promising a rate by contract size is promising something no underwriter has agreed to.
What this page does not cover
This is the federal definition and a sample of state statutory amounts. It does not tell you what your own bond will cost, because that figure does not exist until an underwriter has seen your accounts.
It also does not address bid guarantees, where the penal sum is expressed as a percentage of the bid price rather than the contract price, or how the penal sum moves when the contract price changes after award — both are separate mechanics with their own rules.
