Everything You Need to Know About Performance Bond Insurance
Performance Bonds are commonly associated with insurance, which is not the case. When you’re involved in construction or contracting, especially bidding on significant projects, one of the key terms you’ll encounter is a Performance Bond.
In this blog we’ll cover what Performance Bond means, why it matters, how it works, and how contractors can approach it, all with a view to the UK market and your role as a contractor working with brokers like CG Bonds.
What is Performance Bond?
In simple terms, a Performance Bond is a form of financial security. A Performance Bond is often required by the employer when they award a contract to a contractor. It provides them with reassurance that the contractor will meet all agreed contractual obligations.
If you don’t meet them, for example due to insolvency or failure to complete the work to specification, the Bond may be called to compensate the employer for losses. Sometimes people refer to these as Performance Bond insurance because, from the contractor’s viewpoint, you’re essentially buying a guarantee/insurance‑type product (via a surety or broker) that backs your performance.
However, it’s not insurance in the pure sense of indemnifying you for losses; rather it’s securing the employer against your non‑performance.
Key Features of Performance Bond
- The Performance Bond amount is often a percentage of contract value, commonly around 10% for many UK contracts.
- There are different types of wording: Conditional (requiring evidence of default) and On‑demand/Unconditional Bonds (which allow the employer to call the bond without proving default).
- The contractor typically arranges and pays for the Bond (as part of your tender cost) so understanding the cost, timing, and requirements is crucial for your tender management.
Why Performance Bond Insurance Matters for Contractors
As a contractor, you may view Performance Bonds primarily as a cost or hurdle imposed by the employer. But they can work in your favour too, provided you understand them and manage them correctly.
Why your employer wants it:
- It gives the employer (beneficiary) financial security: if you fail to deliver, the Bond is there as a fallback. The principal (contractor) may become insolvent or fail to complete works, and the Bond protects the beneficiary.
- It increases the employer’s confidence in awarding you the contract: knowing you have backing in place can reduce their perceived risk.
- It helps define clear risk allocation: the contractor carries the performance risk and the employer holds the guarantee.
Why it can help you as a contractor:
- It may allow you to bid for larger contracts or projects which have bond requirements.
- Mitigates the need for retention, which can significantly impact cash flow at project commencement.
- It can enhance your credibility: having the ability (via broker or surety) to secure a Performance Bond shows you have financial strength.
| With a specialist broker like CG Bonds, you can secure more competitive terms. CG Bonds offer a Best Price Guarantee and fast turnaround for bond quotes. |
How Performance Bond Works (Step‑by‑Step)
Here’s a typical flow of how Performance Bond insurance will work for you as a contractor:
Contract negotiation
You identify that the contract requires a Performance Bond (or contract guarantee). You review the contract wording and Bond clause: size of bond, type of Bond (conditional/on‑demand), and timing (when it must be in place, when it expires).
Approach a specialist broker/surety
You engage a broker (such as CG Bonds) who specialises in Performance Bonds. They’ll ask for key information: your recent audited accounts, management accounts, the contract value, contract scope, your experience, and bond wording if known.
Underwriting & quotation
The broker presents your risk profile to the underwriting panel (sureties) and obtains quotes for the Bond premium (or fee) plus any collateral/indemnities required, based on your size, risk, contract term, and Bond wording.
Bond issuance & delivery
Once you accept the quote and provide required documentation/indemnities, the surety issues the Bond in favour of the employer/beneficiary. You must ensure the employer receives the original or required copy.
Contract performance phase
You deliver the works as agreed in the contract. The Bond remains alive during the contract term (and possibly during defects liability or warranty period). You monitor any triggers for release or expiry.
Expiry or release
Once your obligations are fulfilled (practical completion, defects cleared), the Bond is released or expires. Make sure you understand conditions for release.
If a non‑performance event occurs
If you default (insolvency, abandonment, or failure to complete) and the employer makes a valid call, the surety pays the employer under the Bond (within the Bond amount and subject to Bond wording).
Key Considerations for Performance Bond
When you’re dealing with Performance Bond insurance, for your own protection and better bid planning, here are the issues you should pay attention to:
Bond Wording and Type
On‑demand (Unconditional) Bonds cost more and place greater risk on you, because the employer can call the Bond without proving default.
Conditional Bonds require proof of actual default/breach by you, which may offer you more protection. You need to review the wording carefully.
Check expiry triggers, claims notices, governing law, assignment/novation clauses, and how variations impact the Bond.
Bond Amount Relative to Contract Value
Standard rule of thumb around 5‑10% of contract value applies in many UK cases. Higher risk, longer duration, or weaker contractor history may push higher percentages or stricter terms.
As you budget your tender, you must include the cost of the Bond and understand how it impacts your cash flow or margin.
Your Financial and Operational Strength
Sureties will look closely at your audited accounts, recent management accounts, your experience, contract pipeline and project‑specific risks. If you’re smaller, newer or your project is high risk, you may face higher premiums, collateral/indemnities or additional conditions.
Timing and Coordination
Apply for the Bond early enough to meet your employer’s deadlines. We provide a fast turnaround (5‑7 days) once a full application is submitted.
Ensure the Bond is in place before contract start; delays may cause start‑up problems or even disqualification.
Make sure you diarise the Bond’s expiry or release conditions, so you’re not left with unnecessary Bond security beyond your obligations.
Cost vs Benefit
The premium or fee you pay is a cost you need to incorporate into your tender pricing.
But the benefit may be greater: access to larger contracts, improved credibility and potentially more favourable contract terms. Whilst also protecting vital working capital at project commencement.
You need to weigh the cost of the Bond versus alternatives (e.g., higher retention, cash guarantees).
Alternatives and Complements
Some contracts may ask for different or additional security: Retention Bonds, parent company guarantees, letters of credit. In some cases, you may negotiate a combination of multiple types of security.
Understanding where Performance Bond insurance sits in your risk‑management toolkit is important.
How CG Bonds Supports Contractors With Performance Bond
As a contractor looking for Performance Bond insurance, choosing the right broker matters. CG Bonds bring a number of advantages you should consider. We specialise solely in contract guarantee / Performance Bonds (not a general insurance broker), as such, we have a 100% track record of securing Bonds for clients of all sizes and financial strength.
We also offer a Best Price Guarantee, meaning we aim to beat any competing quote, which helps reduce your Bond fees. We provide a streamlined application process with easy‑to‑fill forms, and can assist you over the telephone via a dedicated account manager ensuring you don’t get bogged down in paperwork.
If you engage early with CG Bonds (or a similar specialist broker) before you submit your tender, you’ll be more prepared, you’ll have the cost built in, and you’ll reduce the risk of missing the employer’s Bond deadline.
With the right preparation and partner, Performance Bond insurance becomes a tool that helps you win work, protect yourself and deliver your contract with confidence.
Fill in our quick application form and get your Performance Bond today.
