What do performance bonds cover?

What is a performance bond?

Performance bonds are a type of financial guarantee. They are issued by a bank or insurer, on behalf of a builder or contractor, to the other party in a project contract (i.e. the client).

The bond guarantees a certain amount of money to the client if the project cannot be completed by the builder for some reason.

This arrangement provides important protection and peace of mind to clients. They may insist upon them as part of a contract.

What do performance bonds cover specifically?

What a bond will cover may partly depend on the nature of the project and the terms of the bond itself.

The main purpose is to ensure the client can complete the project if the builder does not or cannot do so. This might be because the builder has gone insolvent or cannot meet a project’s specifications.

The bond will be in the form of a cash payment to cover the costs of appointing a new contractor.

What and when will a performance bond pay out?

If you have a conditional performance bond, the client will need to prove that the contract has not been completed and that they have suffered a loss.

If you have an on-demand performance bond, the amount specified in the bond will be paid out immediately if the client provides a demand in writing.

Will my expenses be covered?

A performance bond is not the same as ‘insurance’. In most cases, the guarantor (the bank or insurer who issued the bond) will pay the client, but then look to the builder for repayment of the amount.

If a performance bond does not protect me, why would I want one?

It is often a requirement of a contract that you should have one to win the project. If a bond is required, it will be your responsibility to organise the performance bond and pay for it. You will need to supply proof to the client that you have done so.