What are performance bonds in construction?

What are performance bonds?

Performance bonds are a type of guarantee provided to a client by an insurer, on behalf of the contractor, that the work set out in a contract will be completed to spec and on time.

It is increasingly common for a client to request a performance bond, particularly if there is a clear risk that the contractor may not fulfil their contractual obligations.

How do performance bonds work?

If a client requires a contractor to have a performance bond, they will normally say so in the pre-contract negotiations or tender documents. The contractor then has the responsibility of obtaining a performance bond.

A performance bond is secured by applying to an insurance company. If the application is successful, the insurer will guarantee to pay the client a pre-agreed sum of money if the contractor is unable to complete the project.

Which types of contractors need to get performance bonds?

This will depend on the individual contract and client, but any contractor could potentially be asked to have a performance bond – whether they operate as a small, limited company or are a self-employed sole trader.

Performance bonds can be used to secure any type of project, even if it’s small in scale or budget.

Who pays for a performance bond?

It is the contractor who pays for a performance bond and has the responsibility of organising one. In the event a client must claim on the bond, the insurer will pay money to the client, not the contractor.

Will I be able to get a performance bond?

This will depend on the information you supply to an insurer. If you’ve been asked to get a performance bond, you will need to contact an insurance company that specialises in bonds for the construction industry.

The insurer will explain what information to supply in your application and whether you are likely to be eligible.