Construction performance bonds

Summary

We draft, negotiate, review, and advise on performance bonds and other ways to reduce or minimise the impact of a contractor’s default or insolvency. Our construction team provides experienced, cost effective and commercial advice on all aspects of construction project security and construction law. A performance bond is a financial guarantee that protects a developer against the risk of contractor default. It ensures that funds are available if the contractor becomes insolvent or fails to complete the project in line with the contract. Performance bonds are commonly used in the UK construction industry, particularly for large-scale or high-value developments. They are often a requirement under building contracts or imposed by funders to mitigate financial risk. Typically, the contractor will be required to arrange and pay for the performance bond, which is issued by a bank or insurance company in favour of the developer. Performance bonds can be expensive and are often non-negotiable. * Scope and amount \- clearly define the bond's coverage and maximum claim amount. Typically around 10% of the contract value but can vary. * Expiry \- contractors should ensure the bond has a clear.

Key information

• Scope and amount \- clearly define the bond's coverage and maximum claim amount. Typically around 10% of the contract value but can vary.
• Expiry \- contractors should ensure the bond has a clear expiry date, often on the date of Practical Completion.
• Claims process \- how and when a claim will be ‘answered’ will depend on the drafting of the bond. In the event a valid claim is triggered, the surety reimburses the employer up to the bond's value.
• Default performance bond (payable on demonstrable default) – this requires proof of non-performance or breach of contract to trigger payment and reimbursement is generally limited to actual losses. This is generally the preferred option on UK construction projects.
• On demand bond (payable on the beneficiary's demand) \- allows payment without demonstrating a default and generally offers full coverage up to the bonded amount. On demand performance bonds are usually issued by banks in the form of a letter to the beneficiary and are more common on international construction projects.
• Parent company guarantee \- consider a guarantee if the contractor has a parent company,.
• Cash retention \- hold back a larger portion of the contract sum as security.
• Other forms of performance security – consider other options to limit the risk of non-performance, such as an advance payment guarantee/bond; off-site materials bond; tender guarantee/bid bond; retention bond; defects liability bond or an adjudication bond.
• Drafting and reviewing performance bond documentation
• Negotiate bond terms \- with banks, sureties, and counterparties.
• Assess risks and liabilities associated with performance bonds.
• Advise on calling or resisting a call on a performance bond.

Practical guidance

• Source: Construction performance bonds

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