Performance Bond

A performance bond is a formal financial guarantee issued by an insurance company or bank (the surety) on behalf of a contractor, in favor of the project client or funder. If the contractor fails to complete the works - through insolvency, abandonment, or material breach - the bond allows the client to claim against the surety rather than pursuing the contractor alone. In UK construction, performance bonds are most common on public sector contracts, larger commercial builds, and schemes where a lender requires additional delivery security.

Types and Typical Values

There are two main types used in the UK. Conditional bonds require the client to demonstrate evidence of contractor default before a claim is made - these are more common and more affordable. On-demand bonds can be called with less evidence and provide stronger protection but cost more for the contractor to obtain.

Bonds are typically issued for 10% of the contract sum. On a £1 million contract, the bond covers up to £100,000. The contractor pays a premium to an insurer or broker to obtain the bond; cost varies with the contractor's financial profile and project risk.

Performance bonds are separate from retention. Retention holds back part of the contractor's payments during the project as security against defects. A performance bond is a third-party instrument protecting the client if the contractor fails to complete entirely. Both mechanisms are often used on the same contract.

Zigaflow's Contracts module helps project managers track bond requirements, values, and expiry dates as part of the contract record.