Performance Bonds (Surety)

What is it

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.