What is a Performance Bond?
Also known as a Contract Bond, this is a surety bond issued by an insurance company or a bank to guarantee satisfactory completion of a project by a contractor (the Principal). For example, a contractor may be required under the terms of the project, to provide a performance bond to be issued in favour of a client for whom the contractor is constructing a building.
Performance Bonds are commonly used in construction contracts to provide security for clients (the Obligee/Beneficiary) working with contractors. If the contractor fails to construct the building according to the specifications laid out by the contract (most often due to insolvency of the contractor), the client is guaranteed compensation for any monetary loss up to the amount of the bond. This money covers any losses incurred by the client – for instance, the cost of finding new contractors to complete an unfinished project.
Performance Bonds are mandatory in all government projects, as well as for many private sector projects. The Bid (or tender) Bond required as part of the tender process is replaced by a Performance Bond when the project commences.
A construction Performance Bond will normally cost 10% of the contract value, but this can vary depending on the contractor’s credit and financial history, the size of the project, and other factors. Our experienced team work with Surety providers globally and will ensure the best terms and value for money for your bonding requirements.
Performance Bonds may also provide a guarantee after a contract is finished, during the defects liability period which normally lasts for 6 – 24 months. If there are structural defects or maintenance issues, the contractor will be required to bring the work up to the correct standard. Some (Beneficiaries) may require an instrument separate from the performance bond to cover a contractual maintenance provision this may also be called a Retention Bond / Maintenance Bond.
On-demand Performance Bonds vs Conditional Performance Bonds
There are two types of performance bonds
- On-demand Performance Bonds
- Conditional Performance Bonds
On-demand Bonds stipulate that if requested in writing, the bond will immediately be paid out in full. The client (the Obligee) will not need to prove anything (including the contractor’s liability) or fulfil any conditions to claim the bond. These are most commonly used in large, international projects.
Conditional Performance Bonds are a more popular choice and require that the client (the Obligee) meets certain conditions before the bond will be paid out. This normally means that the client has to provide evidence that the contractor (the Principal) did not meet their obligations and fulfil the contract, and that they have therefore suffered losses. Conditional Bonds also cover the client in the event of the contractor becoming insolvent. It is essential that contracts are very clear and precise so that it is easy to judge whether or not the contractor has met their contractual obligations.
Why do you require a Performance Bond?
- For the Client, it guarantees satisfactory completion of a project by a contractor
- For the contractor, it is often a prerequisite under the terms of the contract terms to tender for and be awarded a project.
Who requires a Performance Bond?
- Service sector companies
- Engineering companies
- Commercial companies.
Who is the beneficiary of a Performance Bond?
- Local authorities
- Government bodies
- Commercial companies
- Main contractor
Our team of surety specialists have established lasting relationships within the Construction Industry. Our clients include large construction companies, engineering companies and developers. Over the years we have also grown our portfolio of access to surety providers and underwriters. We have gained a reputation for expert advice and a client focused service that seamlessly delivers tailored solutions. And with our experience and industry knowledge we don’t waste time in finding the best value solution for your surety requirements.
If you are looking to secure a Performance Bond, contact us today, we would be happy to discuss your options with you.
To Get Started:
- Complete the Performance Bond Proposal Form.
- Last two years consolidated audited accounts.
- Up-to-date management accounts.
- Details of banking and borrowing facilities.
[Bank information Form here]
(Client needs to send to their bank for completion.)
- Details of bonding requirements.
- Advise form of contract.
- Copy of bond wording required.