CLOSE SEARCH
Table of contents
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 arranges and pays for the performance bond, which is issued by a bank or insurance company in favour of the developer. The bond provides reassurance that the contractor is financially supported and committed to delivering the project, helping protect the developer’s investment and timelines.
Scope and amount - clearly define the bond's coverage and maximum claim amount. Typically around 10% of the contract value but can vary.
Expiry - ensure the bond has a clear expiry date which aligns with the project's timeline, deploying common terminology used in the building contract. Bonds often expire on the date of Practical Completion. It is at this point the project has been handed over, and an employer will hold retention monies in relation to any liabilities during the defect liability period.
Amendments to building contract – consider whether it is necessary to include a provision that states amendments and changes to the building contract do not release, permit evasion of liability, or otherwise allow for dispute on the extent of the Surety’s liability in such circumstances.
Claims process - outline the steps involved in triggering and resolving claims. 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.
The two most commonly used forms of bonds on construction projects are:
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 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.
Due diligence - conduct thorough and in-depth background checks on contractors.
Parent company guarantee - consider a guarantee from the contractor's parent company, meaning that if the contractor is in default of the building contract, the "parent" can be required to remedy the breach, and/or complete the works and/or pay damages due to the contractor's default.
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.
Regular instructions we receive and have experience in include :-
Drafting and reviewing performance bond documentation - to ensure it protects your interests
Advising on the appropriate type of bond - (on-demand vs. conditional) for your project
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
Handle disputes relating to performance bond claims, including court proceedings and ADR
Get in touch
If you would like to speak with a member of the team you can contact us on:
Solicitor - Construction & Engineering
Daniel is a Consultant.
He is a Construction & Engineering law specialist and covers the full span of construction matters across a range of sectors including private wealth, office, living, logistics, hospitality & leisure and energy &am...
