Public owners do not gamble with critical infrastructure. When a transportation agency lets a highway or bridge contract, it expects the work to be delivered on time, to spec, and without leaving the public holding the bag if a contractor fails. That is the purpose of performance security. On most projects, the instrument is a surety-backed performance bond. Increasingly, though, agencies are either offering or requiring a cash performance bond option, especially on smaller jobs or when market conditions make surety bonding costly or slow. Understanding how cash performance bonds function, when they are appropriate, and how they differ from surety bonds matters for contractors bidding work and for owners safeguarding taxpayer dollars.
I have spent years on both sides of the table, preparing bids as a contractor and administering contracts for public owners. The cash option looks simple, and in one sense it is: cash changes hands up front. But it carries operational and financial consequences that ripple through procurement, project controls, and cash management. Get the details wrong and you can tie up working capital, misprice risk, or violate statutory requirements.
What a cash performance bond is and what it is not
A cash performance bond is not a bond in the surety sense. It is a deposit of money or equivalent security by the contractor with the owner, held as collateral to secure performance obligations under the contract. In highway and bridge work, the deposit amount typically equals the required performance bond percentage stated in the invitation for bids, often 100 percent of the contract price but sometimes less for maintenance or specialty scopes. Some agencies accept cash only for small projects, say under 1 to 5 million dollars, while mandating surety bonds for larger awards.
Agencies rarely want bags of currency. “Cash” in this context usually means one of the following: a certified or cashier’s check payable to the owner, a wire transfer to an escrow account under the owner’s control, or marketable securities placed in a pledged account with a perfected security interest in favor of the owner. Some owners broaden the definition to accept irrevocable standby letters of credit, which sit in a grey area. They are not cash, but they are callable instruments that function similarly from the owner’s perspective. In a few states, statutes define permissible security as cash, cashier’s check, letter of credit, or negotiable government securities, with strict collateral haircuts and valuation rules.
What cash performance bonds are not is insurance. No third party is promising to step in, pay subs, or complete the work. The owner’s sole remedy under a cash performance bond is to draw on the deposit to fund completion or cure defects. That sounds comforting to the owner, but it also means the owner takes on the administration of those funds and the responsibility to justify draws, manage completion, and reconcile at closeout.
Why agencies ask for cash
The policy logic varies. In rural counties and smaller municipalities, officials tell me they like cash security because it is tangible, easy to understand, and avoids the headache of chasing a surety through a default process. On federal-aid projects under the simplified acquisition threshold, some state DOTs permit deposits to expedite awards when surety markets tighten. During periods when surety underwriting becomes conservative, such as after a spate of contractor failures, the cash alternative keeps procurement moving.
On emergency bridge repairs after floods or scour events, a cash performance bond can shave days or weeks off mobilization. The contractor wires funds, the agency verifies receipt, and work begins. By contrast, negotiating a surety bond form acceptable to both sides, especially if the owner insists on a non-standard form, can slow notice to proceed. Agencies with standing escrow arrangements can process cash deposits in a day.
There is also the cost angle. Surety premiums for performance bonds typically fall in the range of 0.5 to 3 percent of the contract value for qualified contractors, with rates rising for longer durations and riskier scopes. A cash deposit seems cheaper on its face. Yet the contractor incurs a carrying cost and an opportunity cost on tied-up working capital, which can exceed the surety premium depending on interest rates and company leverage. Owners who understand that trade-off sometimes offer interest on deposits held in escrow, pegged to a benchmark minus a spread, to level the field.
Statutory and regulatory foundations
The starting point is state law. Most states have “Little Miller Act” statutes that mirror the federal Miller Act for public construction. These laws generally require performance and payment bonds from a surety licensed in the state for contracts above a threshold. Many, though not all, provide an alternative: in lieu of a bond, the contractor may furnish cash, a certified check, or other forms of security acceptable to the agency.
The Federal Highway Administration does not prohibit cash security, but federal-aid projects must still satisfy requirements related to subcontractor and supplier protection. That is the catch: a cash performance bond secures performance, not payment. To comply with payment protection requirements, agencies pairing a cash performance bond often require a separate payment bond, or they accept an additional cash or letter-of-credit deposit earmarked for payment claims. When payment security is by deposit rather than bond, the owner takes on claim administration akin to a trust fund.
Local procurement ordinances add layers. A city may cap the percentage of the contract that can be secured by cash or securities, require an escrow agreement in a city-approved form, or mandate that interest earned in escrow accrues to the contractor. I have seen clauses that prohibit the substitution of surety bonds after award if the bid promised cash, and others that allow mid-project conversion from cash to bond with a fee.
Before bidding, contractors should obtain and read the exact specification section on bonds and security, the sample escrow agreement, and any referenced statutes. Two pages of boilerplate can alter the economics of the bid.
How cash performance bonds typically work in practice
The process flows in four steps.
First, at award, the contractor must deposit the required cash security within a stated period, often 10 to 15 calendar days. The deposit goes to an escrow account established by the owner, sometimes with a third-party bank as agent. The escrow agreement defines permitted investments, usually limited to government obligations with short durations, money market funds that hold those obligations, or simply an interest-bearing demand account. Owners insist on perfection of their security interest and control over disbursement.
Second, the owner issues notice to proceed only after confirming receipt and sufficiency of the deposit. If the project uses staged notices to proceed, the owner may accept partial deposits for discrete phases, though this approach is uncommon on roads and bridges where scope is continuous.
Third, during the project, the deposit sits untouched unless the owner declares a contractor default or needs to withhold funds for corrective work. Many agencies also retain progress payments as a separate retention. The cash performance bond does not replace retainage unless the contract says so. The contractor’s accounting team must track the deposit as restricted cash and monitor the impact on covenants and liquidity ratios.
Fourth, at substantial completion and after the cure period for defects, the owner releases the deposit plus accumulated interest, less any draws for completion costs. Release timing is a frequent friction point. Owners require evidence of final completion, acceptance of punch-list items, proof of payment to subs if a separate payment security is not in place, and closeout documentation. When federal funds are involved, certification and audit steps add a few weeks. Contractors that assume they will get their cash back right at substantial completion are often disappointed.
Sizing and adjustments
Performance security levels vary by jurisdiction, but three patterns dominate highway and bridge work. Many state DOTs specify 100 percent performance security, aligned with surety practice. Some reduce the requirement to 50 percent for maintenance overlays or signal work with low performance risk. A few allow graduated security, where the cash deposit tracks the unearned contract value and steps down as work progresses, similar to a rolling retainage concept. Graduated security minimizes tied-up capital but requires careful administration and clear triggers for reduction.
Change orders complicate matters. If the contract price increases, the performance security requirement typically increases proportionally, and the contractor must top up the deposit within a fixed number of days after the change order is executed. If the price decreases, the contractor is entitled to a partial return. These mechanics should be spelled out in the form. If the agreement is silent, expect the owner to hold the higher amount until final acceptance to avoid administrative churn.
Comparing cash performance bonds to surety bonds
From a contractor’s vantage, the surety bond is a credit product. The surety underwrites the contractor’s capacity, charges a premium, and provides a promise to the owner that the contractor will perform. If the contractor defaults, the surety steps in to finance completion, tender a replacement contractor, or pay damages up to the penal sum. Cash deposits, by contrast, shift the financing burden to the contractor and the administration burden to the owner.
Owners weigh different trade-offs. With a surety bond, the owner gains a third-party completion mechanism but can face delays while the surety investigates, and disputes about the scope of the surety’s obligations are common. With cash in hand, the owner can move quickly to apply funds toward completion, but must document default properly and manage completion, often with existing project controls staff who may not have experience running a takeover.
The cost calculus cuts both ways. A 1 percent premium on a 20 million dollar bridge contract is 200,000 dollars. Posting 20 million dollars in cash for eighteen months at a 6 percent opportunity cost is far more expensive, though no contractor would deposit pure cash for that duration without financing. Most who choose the cash option do so on smaller projects or rely on bank lines to fund the deposit. When interest rates are low and lines are cheap, cash can make sense. As rates rise, surety premiums look relatively economical.
Payment security and the subcontractor lens
On any project bonded under a Little Miller Act, payment security exists to protect subs and suppliers because mechanics liens cannot attach to public property. If a contractor opts for a cash performance bond, the owner still must ensure a payment mechanism is in place. The most common approach is to maintain a standard surety payment bond alongside the cash performance bond. This hybrid addresses the core risk: unpaid subs and suppliers.
Some agencies allow parallel cash or letter-of-credit deposits to secure payment claims, placed in a separate escrow with claim resolution procedures laid out in the contract. This approach can work, but it demands a clear protocol for making and adjudicating claims, time limits aligned with statutory filing windows, and a fair dispute resolution mechanism. Otherwise, the owner becomes both paymaster and judge, creating conflicts and administrative burden.
Subs should pay attention to the security package listed in the advertisement and at pre-bid. A cash performance bond alone does nothing for them. Prudent subs ask to see the payment security form and, if it is not a standard surety bond, clarify how claims are made and paid.
Practical details that trip up teams
Two recurring issues cause headaches. First, source-of-funds restrictions. Some public bodies prohibit the use of borrowed funds for deposits, especially if the deposit will be pledged or re-pledged. Others do not care where the cash comes from as long as it arrives. Contractors relying on revolving lines should check covenants. Many bank facilities restrict pledging cash to third parties or require the bank’s consent. I have seen closings delayed because the lender insisted on an intercreditor agreement with the owner, a non-starter for the agency.
Second, investment and interest. Contracts differ in who earns the interest on the deposit and at what rate. If the escrow invests in Treasury bills, the interest can be meaningful. If the escrow sits in a non-interest-bearing account, the contractor eats the entire opportunity cost. The escrow agreement should define permissible investments, allocation of interest, and responsibility for taxes on interest earned. Some owners default to conservative vehicles that preserve principal but can lag short-term rates. Contractors with strong treasury teams negotiate for sweep features within the owner’s policy limits.
A third item shows up less often but matters on larger programs: interaction with retainage. If a contract requires a 10 percent retainage and a 100 percent cash performance bond, the contractor may be financing more than is necessary to secure performance risk. Some agencies reduce retainage when cash security is posted, or allow retainage to decline to zero once work reaches a certain completion percentage, given the owner’s ready access to the deposit. Without such concessions, bidders price the carrying cost into unit rates, which can inflate pay items across the board.
Claiming the deposit: owner responsibilities and pitfalls
Drawing on a cash performance bond is not a free-for-all. Public owners must document default, provide notice, and give the contractor an opportunity to cure if required by the contract. Courts do not look kindly on precipitous draws without a record, even when performance has been poor. On highway and bridge jobs, common triggers include failure to maintain traffic control, missed critical path milestones, or quality issues such as unacceptable pavement density results or rebar placement errors.
When an owner draws, the accounting gets visible. The deposit becomes public money. The agency must track expenditures, contract for completion work using procurement rules, and reconcile costs against the penal sum. Good practice includes segregating drawdowns for performance versus post-acceptance warranty work, and keeping contemporaneous records. If the project receives federal funds, drawdowns may be subject to additional audit requirements and may affect reimbursement if not handled within the grant conditions.
Owners also need a plan for partially completed elements. If the contractor defaults after placing a deck pour, for example, the completion contractor will likely demand a premium and disclaim responsibility for prior work. Drawing on the cash deposit should align with a realistic completion budget, including testing, traffic control extensions, and mobilization-demicobilization twice. That budget should incorporate the time value of money if seasonal windows limit work, a frequent factor in northern climates where winter shutdowns push paving and striping into the next season.
Contractor strategies to manage the cash option
Contractors that use cash performance bonds successfully treat the deposit as a project financing component, not a compliance afterthought. Treasury, legal, project controls, and estimating collaborate early. The estimator reflects the carrying cost in the bid spread. Treasury secures a facility or identifies internal cash sources that will not trigger covenants. Legal reviews the escrow and bond provisions to clean up ambiguous reduction and release language. Project controls plan for the step-downs if permitted and schedule milestones that trigger reductions to minimize time at peak deposit.
Two operational tactics help:
- Model the deposit curve. Map the deposit requirement over time, including expected change orders, potential early reductions, and probable release date. Compare the net present cost of cash versus a surety premium, using your actual borrowing rate and alternative use of funds. Run scenarios for delays, because the most expensive outcome is a deposit stranded for months after substantial completion. Negotiate the form where possible. Many agencies are rigid, but some will allow a standard escrow form that permits permitted investments with same-day liquidity, clearly allocates interest, and defines objective reduction triggers tied to percent complete or accepted milestones. The more objective the triggers, the less risk of disputes.
For small contractors without robust lines, consider a hybrid approach. Use a surety performance bond on larger, long-duration elements and a cash deposit on smaller, short-duration scopes like signal upgrades or guardrail runs where the deposit will be returned quickly. Agencies that bid work in packages sometimes accommodate this mix.
Payment applications and the interplay with cash security
Cash performance bonds do not change the mechanics of progress payments, but they influence owner behavior on withholds. Inspectors and project engineers, knowing the agency holds cash, may be more willing to allow release of retainage at higher completion percentages. Conversely, some agencies adopt a policy of holding both full retainage and full deposit until punch-list completion to eliminate any risk. Contractors should ask at preconstruction for the agency’s practice and document it in meeting minutes.
Pay items that hinge on performance criteria deserve special attention. For instance, incentive-disincentive clauses tied to days ahead or behind schedule, or smoothness bonuses for paving. If disincentives are assessed, can the agency draw on the cash deposit immediately, or must it net them from future pay estimates? The answer lives in the contract. Clarity prevents surprise draws that disrupt cash flow.
Edge cases on bridge and highway projects
Specialty scopes bring wrinkles. On design-build, the performance security often covers both design and construction. Cash deposits in design-build introduce questions about intellectual property handover on default, liability allocation for design errors, and the linkage between design progress and deposit reductions. Owners should draft carefully to ensure that a cash draw does not inadvertently waive claims against designers or professional liability carriers.
On multi-year paving programs with annual task orders, a master escrow can be set up with an initial deposit and annual true-ups. This arrangement avoids repeated set-up costs but demands rigorous reconciliation at each task order closeout. Contractors must track which chunks of the deposit relate to which task orders to avoid commingling issues.
On projects with utility coordination risk, schedule uncertainty can strand deposits. If a relocation drags six months beyond plan, the deposit may sit while crews are idle. Contractors should negotiate for deposit reductions tied to work actually completed rather than calendar duration, and for carve-outs when owner-caused delays extend the job.
Owner perspectives: when cash makes more sense
From the owner’s seat, cash performance bonds shine when time is critical and the admin team has the capacity to manage completion if needed. Small bridge replacements, scour countermeasures, and culvert rehabs often fall into this bucket. So do emergency slope stabilizations after heavy rain. The costs of surety default processes loom large when the public is detouring twenty miles a day.
Owners should also assess market depth. In regions where only a handful of contractors pursue heavy civil work, sureties can become gatekeepers. Offering a cash option invites more bidders, which can sharpen prices. That said, raising the barrier for smaller firms by requiring large cash deposits may limit competition. A balanced approach sets thresholds: cash permitted up to a contract value where deposits remain manageable, surety required above that, and hybrid options where payment security is maintained through a bond to protect subs.
Training matters. Staff who understand how to set up escrow accounts, draft clear notices of default, and manage completion procurements make the cash option viable. Agencies that do not invest in this capability should stick with surety bonds.
Document hygiene and reducing disputes
Clear writing prevents fights. In the special provisions, define:
- The form and timing of the deposit, acceptable instruments, and any conditions on source of funds. Reduction triggers, expressed as objective milestones or percentages tied to accepted work, and a schedule for top-ups when change orders increase contract value.
Those two items, if nailed down, eliminate most of the ambiguity that leads to strained relationships. Add a clause that states who receives interest, at what rate, and how taxes on interest are handled. If payment security is by deposit rather than bond, embed a clean claim process with deadlines, documentation standards, and a neutral arbitration path if disputes arise.
Contractors should mirror that discipline in internal documents. The project manager’s handbook for the job should flag the deposit as a key deliverable, Axcess Surety insurance assign accountability for monitoring reductions, and include a calendar of triggers and approvals. Closing out the deposit should be a line item in the closeout checklist with named responsible parties.
The cash performance bond in a rising-rate environment
Interest rates shift the ground. At near-zero short-term rates, an escrow that pays modest interest does little to offset the opportunity cost of cash. As rates climb, two effects appear. First, the cost of borrowing to fund deposits rises. The spread between surety premiums and borrowing costs widens, making surety bonds more attractive for long-duration projects. Second, interest earned in escrow, if it accrues to the contractor, can offset some cost on short jobs. I have seen contractors bid cash security on quick-turn culvert replacements in a high-rate environment because the deposit was returned within three months and the interest almost covered the financing cost.
Agency finance policies also evolve with rates. Treasury departments become more protective of investment guidelines to avoid mark-to-market volatility. Expect more owners to restrict investments to same-day liquid instruments and to require that escrow accounts be titled in ways that keep funds off the owner’s balance sheet for accounting purposes while preserving control.
A few grounded examples
A county bridge replacement program in the Midwest, funded by a mix of local and federal dollars, allowed contractors to choose between a surety bond and a cash performance bond for contracts under 2 million dollars. One contractor, with strong internal cash but limited bonding capacity due to concurrent projects, opted for cash on a 1.4 million dollar bridge with a 120-day schedule. The county’s escrow paid Treasury-bill rates minus 25 basis points. The job finished on day 102, punch lists cleared by day 114, and the deposit was released on day 138. The contractor’s all-in carrying cost, net of escrow interest, was roughly 0.45 percent of contract value, cheaper than the 0.9 percent surety quote. That math would have looked different on a 300-day job.
Contrast that with a coastal highway repair after a hurricane. The state DOT used cash performance bonds for emergency patches under 500,000 dollars, but required full surety performance and payment bonds for permanent work. One contractor elected cash on a shoulder stabilization, then ran into permitting delays. The deposit sat for four months longer than expected. The contractor’s CFO later told me the carrying cost erased the margin on that task and strained their revolver availability during peak season.
Finally, a metropolitan agency experimented with a hybrid: cash performance deposits with a surety payment bond standard. The logic was to accelerate takeover options while protecting subs. After a mid-tier contractor defaulted on a ramp reconstruction, the agency used the deposit to fund a takeover agreement with the surety, which tendered a replacement contractor. The arrangement avoided litigation over scope because both owner and surety had funds and incentives to agree. The project finished six weeks late but avoided the months of delay common in contested surety takeovers.
The bottom line for bidders and owners
Cash performance bonds can be a practical tool for highway and bridge work when used judiciously. They are not universally cheaper, nor are they a panacea for performance risk. They transfer cost and administrative burdens in ways that must be priced and planned. Contractors should treat the choice between cash and surety as a financing decision intertwined with schedule risk and contract terms. Owners should be clear-eyed about the responsibilities they assume and draft documents that minimize ambiguity.
When the choice is yours, run the numbers with realistic schedules and borrowing costs. Scrutinize reduction triggers, change order top-ups, and release conditions. If you are an owner, decide in advance where cash security makes sense and build your internal capability to manage it. If you are a contractor, line up financing early, coordinate with your surety and bank, and educate your project team. Done well, a cash performance bond keeps shovels moving and risk in view, which is exactly what the public expects when we tear up a highway or close a bridge.