Public owners do not have the luxury of hoping a contractor will finish the job. Roads must reopen before snow season, treatment plants must meet permit deadlines, schools have to welcome students by fall. That urgency sits behind a web of statutes and procurement rules that make performance security non-negotiable on public works. Most projects satisfy that requirement with surety bonds, but some owners still require or accept a cash performance bond. The choice carries real consequences for contractors, taxpayers, and the timeline of a project.
I have sat on both sides of the table: drafting bid specs for a county wastewater plant, and later counseling a mid-sized contractor who wrestled with whether to post cash to win a fast-track resurfacing job. Cash offers clarity and control. It also ties up capital, shifts risk, and can invert the economics of a project if not priced correctly. This piece unpacks how cash performance bonds work in public works, when they align with statutory compliance, where they outperform surety bonds, and how to manage them without tripping over procurement land mines.
What a cash performance bond actually is
Despite the name, a cash performance bond is not a traditional bond instrument. It is a deposit of money, usually equal to a percentage of the contract value, posted by the contractor for the benefit of the public owner. The funds sit in escrow or a restricted account, sometimes in the owner’s treasury, and serve as security for completion and correction of defects. If the contractor defaults, the owner can draw on the deposit to complete the work or cover damages, subject to whatever notice and cure provisions the contract spells out.
The mechanics vary by jurisdiction. Some owners accept a certified or cashier’s check at contract award, which they convert into a non-interest-bearing deposit held until final acceptance. Others permit an interest-bearing escrow set up in the owner’s name with the contractor as beneficial owner, interest accruing to one party or split as the contract provides. A few allow a letter of credit in lieu of cash, investing in swift bonds which functions similarly but with a bank’s promise rather than a pile of funds.
Owners like cash because it avoids debates over surety obligations and time-consuming claim processes. The trade-off is stewardship: governments that hold cash must establish clear accounting, segregation, and draw procedures to avoid audit findings and disputes.
Legal foundations and how they differ from surety bonds
Most public works statutes in the United States require performance security on prime contracts above a threshold. The federal Miller Act directs primes to furnish performance and payment bonds on federal construction contracts exceeding a dollar minimum. Every state has its own Little Miller Act for state and local projects, which often specify the minimum percentage of coverage, typically 100 percent of the contract price, and the acceptable forms of security.
Some statutes explicitly permit alternatives to surety bonds, such as cash, certified checks, U.S. government obligations, or irrevocable letters of credit. Others are silent, leaving room for local procurement rules to define acceptable forms. Where the law is silent or restrictive, an owner cannot improvise without risking a bid protest or audit exception. Before you put “cash performance bond” in a solicitation, confirm that your enabling statute or procurement code permits cash as either a direct substitute for a performance bond or as a separate security device.
Surety bonds are tripartite: principal, obligee, surety. The surety promises to step in up to the penal sum if the principal fails, and it has defenses, investigation rights, and options for completion. A cash performance bond removes the surety and with it the surety’s claims process. The owner’s right is direct against a fund, limited only by the contract and public finance controls. That speed is attractive, but it also imposes discipline on drafting. If the contract does not spell out when the owner may draw, in what increments, and what documentation is required, disputes will migrate from the surety arena to the courtroom.
For payment security, many statutes treat labor and material differently. Public projects usually pair a performance bond with a payment bond to protect subcontractors and suppliers. Replacing a performance bond with cash does not necessarily satisfy the payment protection requirement. Some jurisdictions allow a cash deposit to cover both obligations if the amount and notice provisions match the statute, but many require a dedicated payment bond regardless. Owners should not assume a single cash deposit cures both needs without checking the statute and any case law interpreting it.
When public owners prefer cash
The preference tends to spike in specific scenarios. After a spate of local contractor failures, a city may tighten its risk posture and ask for cash or letters of credit to avoid wrangling with sureties. Agencies that manage large numbers of small projects, like sidewalk replacements or minor facility upgrades under 250,000 dollars, sometimes find the administrative cost of surety bonds disproportionate and ask for cash equal to 10 to 25 percent of value. In emergency procurements where time is the critical path, an owner may accept cash at award because a surety bond would take too long to underwrite, particularly if the selected contractor is new or thinly capitalized.
On the other hand, for multi-million-dollar bridges or treatment plants, the practicality of posting 100 percent cash craters. Even letters of credit at that scale can be expensive and tie up bank lines that contractors need for payroll and materials. Many owners therefore cap the cash requirement well below the full contract amount, using 5 to 20 percent as a completion hedge while still insisting on a full payment bond from a surety.
Contractor economics and the price of liquidity
Cash is not free. If a contractor sets aside 2 million dollars as security for 18 months, that capital cannot support other bids, purchase discounts, or working capital swings. The cost is the higher of the contractor’s borrowing rate or the opportunity return on capital. On mid-market balance sheets, that cost often runs 6 to 12 percent annually, depending on leverage and bank covenants. On a 2 million dollar deposit for 18 months at 8 percent, the carrying cost is roughly 240,000 dollars. If the contractor cannot pass that cost through, it eats the job’s margin.
Surety bonds, by contrast, typically cost between 0.5 and 3 percent of the contract price for qualified contractors, spread across performance and payment. The exact rate depends on the company’s financials, experience, and the project’s risk profile. For a 10 million dollar public project, total surety premiums might land between 50,000 and 300,000 dollars. Even at the high end, that can be cheaper than locking up millions in cash, especially when the contractor can use the surety’s credit rather than its own.
That math is why sophisticated owners rarely demand full cash security. When they do, they should expect higher bid prices from reputable firms and perhaps a thinner field. Owners that need the immediacy of cash but want competitive pricing can structure a hybrid approach: a smaller cash performance bond for fast recourse, paired with a traditional performance and payment bond that covers the full contract amount. The cash acts as first-loss capital to bridge the period before a surety mobilizes.
How cash claims work in practice
The best test of a security instrument is what happens on a bad day. With a cash performance bond, the draw process should be spelled out in the contract. I advise owners to include a short, plain description: default triggers; notice and cure periods; evidentiary items such as certified pay apps, architect’s certificates, or third-party inspector reports; and a method to calculate draw amounts.
Imagine a city roadway project at 7 percent complete when the prime’s payroll checks start bouncing. The contract defines failure to pay subs as a material default if not cured within seven days after notice. The city issues notice, the prime fails to cure, and the city starts termination procedures. Funds in the cash deposit can then be applied to pay verified subs and to procure temporary traffic control while the city fast-tracks a completion contractor. There is no standby surety waiting period. Money moves as soon as the city’s internal controls permit.
That speed, though, requires internal rigor. A finance officer must track draws and keep a claims file. Any amounts later shown to exceed proper completion or damages can trigger refund obligations and, in extreme cases, disputes or claims of improper taking. Where the statute requires specific notice to subs or a court order before applying funds to certain categories, owners must meet those conditions to avoid jeopardizing recoveries.
For contractors, cash security changes leverage in a default scenario. With a surety bond, a contractor has the surety as an ally to investigate and potentially fight owner claims. With cash, the contractor’s recourse is usually post-draw challenge. That makes upstream documentation essential: daily reports, submittal logs, RFI histories, price change records, and correspondence that shows when owner-caused delays or scope changes occurred. On projects secured by cash, I tell project managers to assume every significant schedule slide will be litigated in the accounting of the deposit and keep their files accordingly.
Drafting the contract: avoid fuzzy edges
Most disputes arise from missing or ambiguous language. If you are the owner, embed these elements in your general conditions and the special provisions for cash security:
- Coverage and amount: define the percentage or fixed sum, whether it covers only performance or also payment obligations, and how the amount adjusts for change orders or deductive credits. Deposit mechanics: acceptable forms (certified check, wire to a named account), who holds the funds, whether the deposit earns interest, and to whom the interest accrues. Draw process: default triggers, notice and cure timeline, documentation required, draw frequency, and accounting reports provided to the contractor. Release conditions: substantial completion versus final completion, retention for warranty periods, and procedures for partial releases on phased projects. Interaction with other security: if there is also a surety bond or letter of credit, which source pays first and how recoveries from one source affect the other.
Resist the urge to copy boilerplate from a bond form. Cash security is a different animal and benefits from straightforward language that finance staff, project managers, and auditors can follow.
Compliance checkpoints for public owners
Procurement in the public sector is a contact sport. Transparency, equal footing for bidders, and adherence to statute are the referee’s whistle. Cash performance bonds sit near several sensitive lines.
Start with your enabling authority. Confirm that cash is an allowed form of security for performance and, separately, for payment obligations if you intend to rely on it for both. If the law calls for “bonds issued by a corporate surety,” a solicitation that allows cash instead is vulnerable to protest. If your statute allows cash but requires specific approvals, such as governing board consent for letters of credit or investment of deposits, build those approvals into the timeline before award.
Next, consider fiscal controls. Government auditors will ask how deposits are safeguarded, whether interest is handled correctly under state cash management laws, and how draws are documented. I have seen an otherwise clean highway project flagged for a finding because the treasurer commingled security deposits with general fund cash and failed to credit interest to the appropriate owner or contractor account. Establish a dedicated account, segregate funds by project, and assign a specific custodian.
Bid evaluation must reflect any cost advantage or disadvantage created by security choices. If some bidders furnish surety bonds and others furnish cash, are you comparing like with like? Many owners avoid that issue by specifying one acceptable form for all bidders, or by requiring unit pricing and a single additive or deductive alternate that normalizes the cost of security for comparison. If you allow interest-bearing deposits, clarify in the solicitation who keeps the interest to avoid bidders quietly backing in price assumptions that later lead to change order friction.
Finally, align with labor protections. Payment security is not just a formality; it undergirds prompt pay laws and mechanics lien substitutes. If you rely on cash rather than a payment bond, ensure that subs have a clear, accessible path to claim against the deposit. Spell out notice addresses, time frames, and required documentation. If the statute provides a default path, track it. Skipping these steps can undercut the very protection the security was intended to provide.
Benefits unique to cash security
There is a reason some owners come back to cash even after years with sureties. The immediacy can save weeks. On a library renovation where mold remediation swelled and the prime imploded, a county drew from a 10 percent cash deposit to stabilize the building environment and pay critical subs while the replacement contractor mobilized. Avoiding a winter closure prevented a six-figure escalation. A surety would likely have cooperated, but the county did not have to wait.
Cash can also clean up small disputes, especially near the end of the job. Punch list delays often drag because nobody wants to spend more to recover less. With a defined right to draw for uncompleted punch items at stated unit costs, owners can close out with less acrimony. The contractor gets a clean release of the balance quickly once the scope is done and accounts are reconciled.
On the contractor side, cash can be a differentiator if competitors cannot furnish surety bonds due to capacity or credit issues. A firm with strong liquidity may use a modest cash performance bond on small, frequent task orders to bypass underwriting cycles and move work faster. In markets with many short-duration, under-200,000-dollar jobs, I have seen contractors win more awards simply by being able to post a certified check at pre-con without the two-week scramble for bond riders.
Risks that deserve honest weighting
Cash is not a blanket upgrade. It can create moral hazard if owners see a pot of money and draw first, think later. Every draw should be justifiable under the contract and documented with the same care used to process pay applications. Even honest owners can err when project staff are stretched.
There is also the chilling effect on competition. Cash requirements can quietly filter out smaller local firms that could perform well but do not have spare liquid assets or bank lines for letters of credit. If you value local participation or MWBE goals, test your security terms against the likely bidder pool. Offering phased deposits or lower percentages for proven vendors can preserve competition without surrendering control.
For contractors, the risks are operational. When cash is tied up, liquidity ratios shift. That can trip loan covenants or surety aggregate limits on other projects. I have seen a contractor win a school renovation with a 15 percent cash requirement, only to find that its bank classified the deposit as restricted cash. The resulting dip in working capital triggered a higher borrowing spread that hurt across all jobs. Talk to your bank and surety agent before you bid. A cheap win can become an expensive distraction.
Finally, taxation and interest allocation can be messy. Interest on escrowed deposits may be taxable to one party, shared, or retained by the owner depending on state law and contract language. If the deposit sits in a non-interest-bearing account, the contractor will factor that into its price. Ambiguity here breeds post-award squabbles.
Practical structuring for hybrid security
Where statutes allow flexibility, hybrid models often deliver the best balance. The public owner gets a small pot for quick action, the surety stands behind the full contract, and pricing stays competitive. A typical framework on a 12 million dollar project might look like this: a 100 percent performance and payment bond from a Treasury-listed surety; plus a 5 percent cash performance bond held in an interest-bearing escrow, interest to the contractor; with contract language making the cash the first source for emergency stabilization and narrowly defined punch list draws, and any larger completion costs handled by the surety.
Key to this structure is clarity on subrogation. If the owner draws on cash for completion and the surety later pays to finish, who recovers first from contract balances or claims against the contractor? Spell this out to avoid three-way disputes. Most sureties will accept a modest, well-defined cash layer if they know it reduces their exposure to early, uncertain costs and does not preclude them from exercising completion options.
Special cases: design-build, CM/GC, and task order contracts
Alternative delivery complicates the picture. In design-build, the design liability sits with the contractor team. A cash performance bond covering only construction performance may not reach design defects. If you opt for cash in design-build, couple it with professional liability coverage in adequate limits and durations, and keep a traditional payment bond. For CM/GC with early work packages, cash can secure preconstruction services and the first guaranteed maximum price amendment, but owners should revisit security levels as the GMP grows and add surety bonds at major milestones.
Task order contracts such as job order contracting or IDIQ frameworks benefit from nimble security. Rather than require cash on the master contract, owners can set thresholds where each task order above a dollar figure must be secured by either a surety bond or a small cash deposit. This lets routine, low-risk tasks move without friction while reserving stronger protection for larger orders. Make sure the master agreement authorizes this approach and lays out the options clearly so contractors can price accordingly.
How to evaluate bids when security forms differ
Public owners sometimes receive bids with different security forms, especially when solicitation documents list multiple acceptable options. To keep the field level, publish evaluation rules up front. If you know cash imposes an opportunity cost on contractors, you can normalize by requesting an additive alternate line item for the contractor’s cost of security. In evaluation, compare base bids plus the cost of security so that a bidder does not win simply by hiding the carrying cost of a cash deposit in overhead.
For negotiated work or CM/GC arrangements where the owner sees the contractor’s open book, explicitly negotiate the cost of capital for any required cash performance bond. Anchor it to an objective measure like the contractor’s weighted average borrowing rate, with a cap. Tie accrual to actual days the deposit is in place, and adjust for any interest earned in escrow. This avoids blanket markups and aligns incentives to release funds as early as prudently possible.
A quick field checklist for owners and contractors
- Confirm legal authority: does your statute or procurement code allow a cash performance bond, and for what obligations? Write the mechanics: amount, deposit method, interest, draw triggers, release timing, and audit trail. Preserve competition: test your bidder pool, consider hybrid or scaled percentages, and publish evaluation rules that account for the cost of security. Coordinate finance: establish segregated accounts, assign a custodian, and line up approvals before award. Align with payment protection: ensure subs and suppliers have a clear path to claim and that payment security meets statutory requirements.
Where a cash performance bond makes the most sense
Based on projects I have watched succeed and fail, cash works best in three bands. First, small, repetitive jobs where a 5 to 10 percent cash deposit accelerates mobilization and closeout without distorting price. Second, emergency or stabilization work where speed outruns the surety’s investigative clock and early dollars prevent larger losses. Third, hybrid arrangements on mid-sized projects where a 5 percent cash layer bridges the time until a surety steps in, with clean language to limit the cash to defined early uses.
It performs poorly when owners demand full cash security on large, long-duration projects. The capital cost outstrips any benefit and drives away the most capable firms. It also underperforms when contract language is thin. Vague draw rights invite overreach and retaliation. If you adopt cash, commit to tight drafting, disciplined administration, and respect for the contractor’s legitimate claims.
Notes on the keyword and market usage
The phrase cash performance bond is a bit of a misnomer in legal circles, yet it is common in solicitations and contractor conversations. If you search procurement portals, you will see it attached to bid packages from small municipalities more than state DOTs. Larger agencies tend to specify surety bonds or letters of credit with detailed banking instructions. The terminology matters less than the function: a defined cash deposit that the owner may apply to performance failures under the contract. Whatever you call it, make sure the instrument lines up with your statutory framework and that the contract text controls the mechanics.
Final thoughts from the trenches
Public construction thrives on predictability. Cash security can sharpen that edge by cutting lag time between default and remedy. It can also sharpen conflicts if sloppily designed. The best outcomes I have seen came from owners who asked a simple question at the outset: what problem are we solving? If the answer is speed of early remedial spend, a small, well-governed cash deposit helps. If the answer is comprehensive completion protection, a strong surety relationship with clear default procedures may serve better.
Contractors, for their part, should treat the decision to post cash as an investment choice. Price the cost of capital honestly. Review bank and surety covenants in advance. Negotiate interest and release terms with the same care you devote to schedule milestones. And keep immaculate records. When performance questions arise, the side with the better file often decides how the cash moves.
Public money deserves that level of thoughtfulness. Cash performance bonds are not a cure-all, but in the right setting, with precise terms and disciplined administration, they can be a practical tool that aligns compliance with real-world benefits.