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. the client who holds it until the end of the defects liability period.
The bond is related to the contract conditions and the courts take a view that the bondsman has little protection against adverse risk. So it is wise to seek the bondsman's consent before acting outside the contract conditions, for example by paying the contractors in advance of work undertaken to ease its cash flow difficulties. Such conduct could jeopardise a subsequent claim on the bond.
[edit] Related articles on Designing Buildings Wiki
- Advance payment bond.
- Bid bond.
- Bonds.
- Bonds v guarantees.
- Bondsman.
- Comfort letter.
- Contingency.
- Construction contract.
- Contractor.
- Collateral warranties.
- Contractors' all-risk insurance.
- Escrow.
- Miller Act.
- Parent company guarantee.
- Performance.
- Procurement.
- Professional indemnity insurance.
- Professional Indemnity Insurance clause in conditions of engagement
- Retention.
- Retention bond.
- Retention held in trust fund.
- Surety.
- Tender documentation.
- Warranty.
- Workmanlike manner.
- Zero-coupon bond.
Featured articles and news
Ensuring the trustworthiness of AI systems
A key growth area, including impacts for construction.
Foundations for the Future: A new model for social housing
To create a social housing pipeline, that reduces the need for continuous government funding.
Mutual Investment Models or MIMs
PPP or PFI, enhanced for public interest by the Welsh Government.
Stress Awareness Week and legal duties for employers
Calling employers to follow the five Rs this week.
Key points and relevance to construction of meeting, due to reconvene.
Cladding remediation programmes, transparency and target date.
National Audit Office issue report on cladding remediation.
HBPT and BEAMS Jubilees. Book review.
Does the first Labour budget deliver for the built environment?
What does the UK Budget mean for electrical contractors?
Mixed response as business pays, are there silver linings?
A brownfield housing boost for Liverpool
A 56 million investment from Homes England now approved.
Fostering a future-ready workforce through collaboration
Collaborative Futures: Competence, Capability and Capacity, published and available for download.
Considerate Constructors Scheme acquires Building A Safer Future
Acquisition defines a new era for safety in construction.
AT Awards evening 2024; the winners and finalists
Recognising professionals with outstanding achievements.
Reactions to the Autumn Budget announcement
And key elements of the quoted budget to rebuild Britain.
Chancellor of the Exchequer delivers Budget
Repairing, fixing, rebuilding, protecting and strengthening.
Connecting conservation research and practice with IHBC
State of the art heritage research & practice and guidance.
Innovative Silica Safety Toolkit
Receives funding boost in memory of construction visionary.
Gentle density and the current context of planning changes
How should designers deliver it now as it appears in NPPF.
Sustainable Futures. Redefining Retrofit for Net Zero Living
More speakers confirmed for BSRIA Briefing 2024.
Comments
Nationwide Sureties provide Performance Bonds for Construction Contracts across the country and internationally to help bring new developments to fruition.