What is a performance bond?

A performance bond is frequently required as part of a construction industry contact and is designed to protect a client or developer against the risk of a contractor failing to fulfil their obligations. Commonly this is where the contractor becomes insolvent before completion of the works and before the end of the defect period but can also cover a range of other eventualities.

How much cover does a performance bond give?

A performance bond is similar to insurance but is in fact Surety. Most performance bonds will be for between 5% and 20% of the total contract price but 10% is the norm. The payment is designed to compensate the expenses faced by the developer if the contractor fails in their obligations.

Who purchases the performance bond?

Developers may demand that a contractor provides a bond if they are concerned about being financially exposed. Alternatively contractors may use it as a demonstration of their reliability. In either case the contractor purchases the bond, with the developer or client being the beneficiary.

On Demand Bond or Conditional Bond?

An 'On Demand Bond' is uncommon in the UK and unpopular because, as the name suggests, the provider must pay on demand. On Demand Bonds are most commonly provided by banks. A more attractive option are Conditional Bonds, these are normally issued by Surety companies and will only be paid when the contractor has failed in their obligations.

Where to get a Performance Bond?

Normally bonds are available from banks or surety companies. If purchased from a bank, and the contractor is comfortably in credit and a good interest rate is paid, then the cost of the bond can be attractive but there is the risk that the bond will be On Demand. If not comfortably in credit, then the cost of the bond will likely slice into an onerous overdraft and restrict cashflow. If purchased from a Surety Company, normally via an insurance broker such as Sutcliffe & Co, the bond is more likely to be Conditional and will be totally out of sight of the bank manager. In both cases there may be a requirement for a personal guarantee.

Problems with Performance Bonds?

As already mentioned, beware of On Demand Bonds and the small print imposed if supplied by a bank. Also be aware of the possibility of a personal guarantee. Importantly you should also be aware that the bond is linked to the contract conditions, so making changes to the contract or amending the contractor’s payment periods could invalidate the bond.

Apply for a Performance Bond Now
Sutcliffe & Co are independent insurance brokers with access to a range of surety companies. If you would like help obtaining a Performance Bond or have any queries, then please get in touch either by phone on 01905 21681 or our contact us form.

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