What are performance bonds?

What does ‘performance bond’ mean?

A performance bond is a guarantee, usually issued by a bank or insurance company on behalf of a building company (or a sub-contractor).

If the builder or sub-contractor doesn’t complete a building project as agreed, the guarantor (i.e. the builder) will cover the client’s costs for completing the project.

A performance bond is sometimes also called a contract bond or a surety bond.

Are performance bonds unique to the construction industry?

While they are common in the construction business, similar completion guarantees exist in other industries, such as film and television. They are usually requested by the client but can be required by other parties with a stake in the contract.

When will I be asked for a performance bond?

If there’s a risk that the project won’t be completed, a performance bond provides protection and peace of mind for the client.

How much does a performance bond cover?

It will cover the amount specified in the bond. Most bonds offer about 10% of a contract’s value, but it can be more. This amount should enable the other party to complete the works.

Are there different types of performance bonds?

There are two main types of performance bonds: conditional and on demand.

To claim under a ‘conditional bond’, the client must prove that the builder has not fulfilled their contractual obligations and that, as a result, they have suffered a loss.

With an ‘on demand bond’, the guarantor (the builder) pays the guaranteed amount immediately when requested. The only condition is that the client’s claim is not fraudulent. If the builder wants to contest the claim, they must do so after they have paid.

Who pays for it and who specifies what it should cover?

The need for a performance bond, its terms and the amount required will normally be set out in the tender documents for a construction project.

The builder is responsible for arranging the bond and will pay the cost of it.

Once the builder has a performance bond in place, they must send it to the client. They will keep it until the end of the liability period.