Types of performance bonds

What is a performance bond?

Performance bonds are a guarantee or security provided by a bank or insurance company to a construction firm to guarantee they complete a contracted project. If the contractor does not deliver as promised, the guarantor (i.e. the bank or insurer) pays a lump sum to the client, which allows them to finish the project.

Are there different types of performance bonds?

There are two main categories: ‘on demand’ bonds and ‘conditional’ bonds.

Conditional performance bonds

Under this type of bond, the client must produce evidence that the contractor has not met the terms of the contract. They must also prove they have suffered financial loss as a result. Money will not be paid out until they have done this.

These are the most common type of performance bond in the construction industry. The guarantor is normally an insurance company.

On demand performance bonds

With this type of bond, the guarantor will pay the amount regardless of the contractual position. In other words: the client does not have to provide proof of breach of contract or financial loss.

These bonds are much less common in the UK construction industry. However, they are a standard requirement in many international contracts. The guarantor is more commonly a bank in this situation.

How will I know which type I need?

The project tender documents or the contract itself will normally say what kind of bond you need, as well as the amount it should cover.

The amount guaranteed should usually be enough to cover all potential losses, including damages for breach of contract.

Why have I been asked to provide a performance bond?

A lot of things can go wrong during a construction project. A performance bond provides the client with peace of mind: it makes a strong statement about your ability and solvency, and means the project is also less likely to fail.