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Performance Bond
What is a Performance Bond?

A Performance Bond is a form of security provided by a contractor to their client. It consists of a financial undertaking by a bank, insurance company or other guarantor to make a payment to the client in circumstances where the contractor has defaulted under the contract.
Generally, there are two types of performance bond:

  • On Demand

  • Conditional (Default)

  • On Demand Bonds are not commonly used in the UK construction industry. As the title suggests, the bank, insurance company or other guarantor is required to make a payment under the bond whenever this is demanded, without needing to satisfy any preconditions whatsoever. On demand bonds should be treated with caution (and appropriate advice taken) as they can provide the client with much leverage in the event of a contractual dispute.

    Conditional Bonds are more common within the UK construction industry. Such a bond is usually issued by an insurance company, and payment is usually conditional upon the employer who makes the call proving the amount of loss which he has suffered.

    The value of a performance bond is usually expressed as a percentage of the contract price, usually between five and twenty per cent of the contract price, with ten per cent by far the most common figure.

    A bond issued under English law is usually executed as a deed.

    The cost of a Performance Bond will depend on:

  • Value of the Bond

  • Length of the Bond (which will depend on whether it is released at Practical Completion or at the end of the Defects/Maintenance period)

  • Financial position of the Contractors

  • At Trade Protect, we work with a panel of insurers and financial guarantors who can provide a quotation for your Performance Bond requirements.