Who pays for a performance bond?

What are performance bonds?

A performance bond guarantees that a contracted party will complete a project to spec and on time for the other party in the contract.

If the contactor fails to meet the agreed requirements, a guarantor (usually a bank or insurance provider) will pay the other party.

In most cases, the guarantor will require proof that there has been a failure to meet the terms of the contract before they pay out.

Who must have a performance bond?

There is no law that requires you to have a performance bond. However, a client may insist that one is in place as part of the contractual requirements.

The client may want a construction performance bond if there is a clear element of risk attached to the other party which might jeopardise their building project. An example would be a known shortage of materials or labour impacting the construction industry.

How much does a performance bond need to guarantee?

This will vary from project to project. As a rough rule of thumb, the value of a performance bond is normally expressed as a percentage of the contract price – usually somewhere between 5 and 20 percent.

The idea is that there will be enough paid out under the performance bond to enable the client to complete the project, should the contractor fail to deliver as agreed.

How much does a performance bond cost?

Again, this will vary according to the nature of the project and level of risk.

Who pays for it?

Although it may be the client who insists on a contractor having a performance bond, the contractor is responsible for arranging and paying for a bond.

In other words: if your client wants a performance bond in place before working with you, you will need to pay for it.