What are performance bonds for?

What are performance bonds?

They are a type of financial guarantee, in which an insurer or bank guarantees to the client or developer that the contractor will complete a project on time and to the required specification.

If the contractor fails to do so, the insurance company or bank (the guarantor) will pay the client or developer a sum of money so they can finish the job.

Performance bonds are increasingly common in the construction industry. Many clients and developers will insist on them as part of the contract terms, even with smaller projects. They will often form part of the tender documents if you bid for a project.

Why have I been asked to get a performance bond?

They are often required when economic conditions are tough and insolvencies rise.

Materials and labour supply shortages also make it challenging for some firms to fulfil contractual obligations or put them at risk of going bust.

Who do performance bonds protect?

Performance bonds provide peace of mind for clients and developers, because they guarantee the completion of a project. Should anything go wrong with a project, they will be reimbursed with sufficient funds to finish the project and make good any direct financial losses.

What benefit is a performance bond to me?

As a contractor or builder, performance bonds do not offer you any financial protection. However, the fact that an insurance company or bank is prepared to act as your guarantor is a good indicator to potential clients that you are a financially stable and viable business.

Having the backing of a guarantor, who is willing to take you on as a risk, makes it easier for you to win projects. You may not be able to compete for certain private and government projects without having one in place.

Who pays for a performance bond?

Although a performance bond is there to protect your client, it is you – the contractor – who must organise and pay for it.