How do Performance Bond Claims Work?
One of the most important things to note about Performance Bonds is how they may be called upon, or claimed against. This blog will answer all your questions about how Performance Bond claims work, and when they might be called upon.
What Types of Performance Bonds Exist and Why They Matter for Claims?
Not all Performance Bonds are the same. The Bond’s wording, which defines its type and conditions, has a major bearing on the claims process.
Conditional (Default‑based) Bonds: These require the beneficiary to demonstrate that the contractor has defaulted under the contract (e.g. failed to complete, insolvency, defective work) before a claim is accepted.
On‑Demand (Unconditional) Bonds: These allow the employer to call the Bond more straightforwardly on the basis of a default or abandonment, without needing to prove actual loss or detailed liability. These are less common in standard UK housebuilding but may be used in higher‑risk or more complex projects.
Because of this difference, the ease, speed and certainty of making a claim under a Performance Bond can vary significantly depending on wording.
When and Why a Claim Might Be Made
A Performance Bond claim usually arises in one of the following scenarios:
- The contractor becomes insolvent or goes into liquidation before completing the works.
- The contractor abandons the project, fails to deliver within contract timelines, or otherwise materially breaches the contract.
- The works are completed but are defective, substandard, or do not meet specification/quality standards required under the contract, when the bond wording covers quality or defects liability.
In these cases, calling the Bond gives the employer financial protection, either to finish the project (e.g. via a new contractor), rectify defects, or cover additional costs resulting from the default.
How a Performance Bond Claim Typically Works
- Default or Trigger Event Occurs
The contractor fails to meet obligations, for example, due to insolvency, abandonment, breach of contract, or substandard works. The employer (beneficiary) becomes aware (or is notified) of this default.
- Employer Reviews the Bond Wording and Contract
Before making a claim, the employer must check the bond wording to confirm:
- The type of Bond (Conditional vs On‑Demand)
- What constitutes a valid “trigger event” or default under the Bond?
- Any required procedures or notices if it’s a Conditional Bond.
- Employer Issues a Claim / Demand to the Surety Bond Provider
The beneficiary formally notifies the surety (insurance company or bank) that they intend to call the Bond. If the Bond is On‑Demand, this may simply require a declaration of default. For a Conditional Bond, the employer may need to supply proof of default or evidential documentation showing non‑performance or loss.
- Surety Evaluates the Claim
The Surety reviews the demand, verifies whether the circumstances meet the Bond’s conditions, and decides whether to accept the claim. If accepted, the Surety becomes liable to pay out, up to the Bond’s sum (often a percentage of the contract value, commonly 10% in UK construction contracts)
- Surety Pays Out / Provides Funds
Once liability is established, the Surety pays out the Bond value (or the amount agreed under the claim), which the employer can then use to complete the works (e.g. engage a replacement contractor), rectify defects, or cover losses incurred by contractor default.
- Post‑Claim Processes (Subrogation / Recovery)
After paying out, the surety may have rights to recover money from the original contractor (or their assets) to reimburse the amount paid under the Bond, depending on the Bond’s terms and any indemnities given by the contractor.
CG Bonds Can Help in Supporting Bond Claims
At CG Bonds Surety, we don’t just help clients secure Performance Bonds, we also support them through the life of the project. That includes advising on the bond wording, ensuring compliance, and helping employers understand how and when a bond may be called.
If you anticipate potential issues, or simply want to prepare for worst‑case scenarios (insolvency, default, non‑delivery), having a Bond with clear wording is key. Contact CG Bonds to secure a Performance Bond today.
