Performance Bonds vs Increased Retention: Which is Best for Your Business?
When bidding for construction projects or negotiating terms, contractors increasingly face a choice between Performance Bonds and increased retention. However, many contractors may not know the difference between the two.
Understanding the trade-offs between performance bonds and increased retention is vital if you’re a contractor looking to protect your cash flow, win work, and manage risk.
In this blog, we walk through what each Bond type is, how they differ, and how CG Bonds can help you choose the right route.
What is a Performance Bond?
A Performance Bond (also known as a Contract Guarantee Bond) is a type of Surety Bond that guarantees to the project owner (the employer) that the contractor will fulfil their contractual obligations. If the contractor defaults, through insolvency or failure to complete, the Bond acts as financial protection and can be called upon.
Typically, the Performance Bond amount represents a percentage of the contract, and it is usually around 10% of the contract value (though it depends on risk, size of project, etc).
Key Advantages of a Performance Bond for Contractors
- Helps you win larger contracts or ones requiring a bond.
- Enhances your credibility to the employer: they see you’ve secured a guarantee.
- Frees up cash flow compared to tying up large sums with retention (depending on contract).
- The bond guarantees project completion according to the contract terms, giving the employer peace of mind.
What is Increased Retention/Retention Bonds?
Retention is a long-established method in construction contracts: the employer retains (i.e., withholds) a percentage of interim payments (commonly 2.5–5 %) and releases part at practical completion, the rest at the end of the defects liability period.
In recent years, employers may request higher retention levels (to compensate for higher perceived risk) or a Retention Bond instead of cash retention, where a third-party surety backs the retention amount, so you, as a contractor, retain access to your cash.
Key Advantages for Contractors of a Retention Bond
- Better cash-flow: your money isn’t tied up for months or potentially years until the defects liability period ends.
- Likely lower cost than a large performance bond fee.
- It may make your tender more competitive if you show you’re prepared to release retention via a bond rather than tying up cash.
Key Differences Between Performance Bonds and Increased Retention
| Feature | Performance Bond | Increased Retention (or Retention Bond) |
| Who holds the security? | External surety guarantees a portion of the contract value. | Employer retains part of the payment (or a bond substitutes cash retention). |
| Amount typically | ~5-10% of contract value (can vary). | Retention is usually 2.5-5% standard; “increased” retention may raise this. Increased retention is more onerous on contractor cash flow. |
| Cash-flow impact on the contractor | Contractor keeps the majority of funds; pays bond fee. | Contractor’s funds are withheld until later, or pays for a retention bond. |
| Cover for the employer | Broad cover: possibility of default/insolvency, unsatisfactory performance, etc. | Primarily covers defects/remedy of works and the retention sum; may not cover broader default risks unless the bond wording is wide. |
| Cost/fee to contractor | Fee+ any required indemnity/security; cost varies by risk. | Either the insertion of a higher retention (cost in terms of tied-up capital) or the cost of a Retention Bond (often lower than a full performance bond, but still a cost) |
| Competitive/tender impact | Having a performance bond can make your tender stronger, improve credibility | Offering reduced or replaced retention via bond can improve your cash flow and willingness to bid, but increased retention may weaken your competitiveness if your cost base is higher. |
| Risk reduction for you | Helps you win a contract, but you still must perform; your performance record matters. | Keeps you financially disciplined but increases liquidity risk for you. |
Why Many Employers Ask for A Performance Bond or Increased Retention
From the employer’s side, they want to mitigate their risk; they want assurance that the contractor will complete the job satisfactorily and that any defects will be fixed. A Performance Bond provides strong protection; a higher retention or retention bond gives direct leverage for defects.
Legal commentary suggests that Retention and Performance Bonds are alternative or complementary tools. For example:
Contractors might be asked to provide a Performance Bond and/or accept a higher retention (or Retention Bond). The key is to understand which option works best for you, your business, and the particular project.
How Contractors Can Decide Whether to Get A Performance Bond or Increased Retention
When faced with a tender that requires increased retention or a performance bond (or both), a contractor should consider the following questions:
What are the contract risks and size?
If the project is large, long-term or high risk (complexity, insolvency risk, etc.), a performance bond may be more appropriate for both parties.
What does the employer prefer technically?
Sometimes the contract wording will specify performance bond wording (conditional vs on-demand) or retention terms.
What is the cost to you (fee or cash tied up)?
If a Performance Bond is expensive or you don’t have the financial strength to support it, perhaps negotiating for a retention bond (or lesser retention) may be more beneficial to you.
What is your cash-flow situation?
With high retention, you may have a longer wait for funds, which means strain on working capital. If you have strong liquidity, you may be fine; if not, you want to avoid tying up money for months.
What is your track record and strength?
If you’re an SME or new to bidding on large contracts, offering a performance bond may materially aid the employer in trust. Conversely, if you have a strong track record, you may negotiate better retention terms.
Performance Bonds, Retention Bonds, and Surety Bonds from CG Bonds
For contractors who need bonds or funding, the decision between Performance Bonds and Increased Retention is not just a technicality; it affects your cash-flow, your margin, your competitive position and your risk profile. Engaging early with a specialist such as CG Bonds allows you to explore options, get tailored quotes, and choose the path that supports your business and tender strategy.
To obtain a Performance Bond from CG Bonds Surety, our dedicated client account management team is here to support you every step of the way. To kick-start the application process, we will ask for the following essential information:
- Completed and Signed Application Form
- Most Recent Audited Financial Accounts
- Copy of Performance Bonds Wording (if available)
Contact CG Bonds to enquire about Performance Bonds today!
The information provided in this blog is not intended to constitute legal advice or any other advice of a professional nature. The recipient of this information contained in this blog should always consult legal or professional advice.
