Are performance bonds renewable?
What is a performance bond?
It’s a type of guarantee usually given by an insurance company or bank on behalf of one party to a contract (usually the contractor or builder).
The performance bond is a promise to the client that the contractor will complete a project within the required time and to the required standard.
If the contractor fails to do so, the insurance company or bank will pay a specified amount of money to the client to enable them to complete the project.
When do performance bonds come to an end?
Most end after a set period. The expiry time will be specified in the terms of the bond and will usually depend on the nature and terms of the project.
It should be noted that if something goes wrong after project completion, but it’s related to how the project was carried out, the client may seek to claim under the performance bond.
The chances of a claim succeeding will normally depend on the terms of the bond and the length of time that has passed. However, it is common for bonds to expire after a certain number of years if no claim has been made.
Do I need to renew my performance bond?
Performance bonds are usually tied to a project, so they do not renew. They will remain for the duration of the contract.
The guarantor (i.e. the bank or insurer) will normally want progress reports to ensure the project is on track. If there is a risk of overrun on the part of the contractor, the guarantor may charge the contractor extra.
This is not a renewal fee. The payment relates to the additional risk that has been created due to the overrun.
If the initial time limit for the project’s completion has passed, and the contractor hasn’t met their contractual obligations, they should not assume that they can just renew the performance bond. This will normally not be the case.
Can performance bonds ever be renewed?
Occasionally the parties to a performance bond may agree to extend it beyond its initial expiration date. This may happen if:
- there is limited time before expiration
- the contractor has completed a certain amount of the project
- the contractor is making good progress.
Renewing a bond is just an extension of the period during which the client can rely on the bond to ensure the project is finished.
There are also some long-term bonds that last for more than a year. These may require regular reviews to check the terms are still applicable. However, these may be less relevant for a small business or building contractor.
