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Performance Bond

A performance bond protects a client if a contractor fails to fulfill their contractual obligations by providing compensation up to 10% of the contract value, enabling the client to find a new contractor to complete the work. Bonds can be unconditional or require proof of loss, and are typically required based on the contractor's financial strength. The cost and terms of the bond are the contractor's responsibility.

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59 views1 page

Performance Bond

A performance bond protects a client if a contractor fails to fulfill their contractual obligations by providing compensation up to 10% of the contract value, enabling the client to find a new contractor to complete the work. Bonds can be unconditional or require proof of loss, and are typically required based on the contractor's financial strength. The cost and terms of the bond are the contractor's responsibility.

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Performance bond for construction

A performance bond (or performance security) is commonly used in the construction industry
as a means of insuring a client against the risk of a contractor failing to fulfil contractual
obligations to the client. Performance bonds can also be required from other parties to a
construction contract.

Whether or not a performance bond is required will depend, in the main, on the perceived
financial strength of the party bidding to win a contract, as the most common concern relates
to a contractor becoming insolvent before completing the contract. Where this occurs the
bond provides compensation guaranteed by a third party up to the amount of the performance
bond.

Bonds are typically set at 10% of the contract value. This compensation can enable the client
to overcome difficulties that have been caused by non-performance of the contractor such as,
for example, finding a new contractor to complete the works.

Bonds can be 'on demand' or 'conditional', with conditional bonds requiring that the client
provides evidence that the contractor has not performed their obligations under the contract
and that they have suffered a loss as a consequence.

The obligation for the contractor to provide the client with a bond is set out in the tender
documents. The choice of bondsman and terms with regard to cost falls entirely to the
contractor who secures it prior to the start of work. From a client viewpoint it is wise to
stipulate that the bond stays in place until the end of the defects liability period when the final
certificate is issued.

Bonds can be issued either by an insurance company or by a bank, and the cost of the bond is
usually borne by the contractor (albeit, this is likely to be reflected in the contractor's tender
price). The cost of the bond gives the client a good guide as to the credit worthiness and
reputation of the contractor in the bond market, which will view each contractor differently in
respect of its history, management and financial health.

Strictly speaking, the bond is a guarantee and as such is a contingent liability in regard to the
contractor's balance sheet. A smaller contractor might face a limit on how many bonds it can
take out.

The contractor sends the bond document to the beneficiary, i.e. t

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