Performance Bonds: What are they?

21/05/2020, 13:19 PM by Installsure
Tradesman looking at mobile phone outside
We take a close look at what performance bonds are, how they work and the different types of bond available to businesses.

At Installsure we specialise in helping installation companies manage their risks as well as helping them meet the ever-evolving needs of their clients. This makes us well placed to spot trends in the home improvement insurance market.

One insurance product on the rise in recent years is the performance bond. More and more we’re seeing this type of surety bond required by principal Contractors as part of the conditions of awarding a contract.

For example, a sub-contract to fit new windows to a development of new homes would often require a performance bond to be provided to the principal Contractor. Indeed, performance bonds in construction in general are very common.

Let’s take a closer look at what they are, how they work and the different types of performance bond available.

How do performance bonds work?

Performance bonds are a type of surety bond. They’re also known as contract bonds or performance guarantees.

A performance bond effectively guarantees the satisfactory completion of a project by a Contractor. The bond provides a written guarantee to a contracting company (the beneficiary) against the Contractor (the principal) defaulting on any of its contractual obligations.

This bond represents an amount of money – typically 10% of the contract value - that the beneficiary can gain access to in the event of any defaults.

Get started today – complete and return our Installsure Performance Bond Application Form or contact our team to learn more.

Who pays for a performance bond?

The Contractor, as the principal, pays for the performance bond, while the Employer is the beneficiary.

In the case of a sub-contract, the sub-contractor pays for the performance bond and the principal Contractor is the beneficiary.

Need a performance bond urgently? Contact our team and we'll be in touch to discuss your options.

Construction workers on site smiling shaking hands

On demand vs conditional performance bond

A performance bond can be either 'on demand' or 'conditional'.

On demand performance bonds are an amount of money set out in the bond immediately on demand in writing without needing to satisfy any preconditions whatsoever (including establishing the Contractor’s liability) unless the demand is fraudulent.

Conditional performance bonds require 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.

Performance bond vs advance payment bond

These two insurance products may seem similar but there is a key difference between advance payment guarantees and performance bonds.

Whereas a performance bond provides the Employer with a cash sum in the event of failure of the Contractor to complete their work, an advance payment bond is used to provide security to the Employer where a large deposit is required.

For example: where a manufacturer of bespoke windows has a large order, they might require a large advance payment to fund materials and/or protect themselves against non-payment for goods that have no other use.

The advance payment bond is provided by the manufacturer to the Employer to protect the latter in the event the bespoke windows are not delivered.

Performance bond vs retention bond

Performance bonds are very common in construction contracts, though they aren’t the only bond type we see in this sort of work.

A standard clause in many construction contracts sees the Employer retain 5% or 10% of the contract value to cover any faults in the work.

A retention bond can be used to release this 'locked up cash' by removing the requirement for the Employer to withhold it. Instead, the retention bond provider agrees to undertake to pay the Employer up to the amount of what would have been retained should the Contractor fail to carry out the works and/or resolve defects.

Not sure what type of bond you need? Contact our team and we'll be in touch to discuss your options.

Talk to us about your performance bond requirements

The Installsure team is here to help with all your performance bond enquiries. Get started by completing a Performance Bond Application.

If you need help applying for a performance bond or simply want to know more about this kind of insurance cover, contact our team.