Who Pays for A Performance Bond?
Whenever a contractor is asked to provide a Performance Bond as part of a construction contract, one of the first questions is who pays for the Performance Bond? Understanding this clearly helps you budget your tender, assess your risk, and negotiate contract terms with confidence.
This blog will discuss everything you need to know about who pays for a Performance Bond, how they are funded, and how this benefits contractors.
What is a Performance Bond?
A Performance Bond is a guarantee (also called a Contract Guarantee Bond) provided by a surety or insurer that assures the employer (or project owner) that the contractor (the principal) will fulfil its contractual obligations. If the contractor fails (for example, due to insolvency, abandonment, or defective performance), the Bond provides the employer with financial recourse, allowing them to appoint a new contractor and cover the additional costs of completing the works.
A typical Performance Bond in the UK construction sector might be set at around 10 % of the contract value, though the exact figure will vary with risk, project size, and the contractor’s track record.
Who Arranges and Pays for Performance Bonds?
In almost all cases, it is the contractor who arranges the Performance Bond. The contract may require you, as the contractor, to secure a Bond in favour of the employer (the beneficiary). Although the immediate premium and arrangement cost is borne by the contractor, in practical terms, the cost is typically factored into your tender price.
The contractor pays a premium for the implementation of the bond. They then build that cost into their contract bid or fees, meaning the employer indirectly funds it through the contractor’s price. The employer may not pay the premium separately, unless explicitly agreed.
From the employer’s point of view, they want the security of a Performance Bond, but the risk and cost of arranging that security logically rest with the contractor who is providing the guarantee. That aligns with the wider risk‑allocation in construction contracts; the contractor carries the performance risk.
What Does the Contractor Need to Consider?
Since you are arranging and paying for the Performance Bond, you need to assess some key factors:
Premium/fee cost
The premium you pay will depend on your financial strength, the contract value, the duration, your track record, and the perceived risk of the project. Some sources suggest the average fee for a Performance Bond in the UK are around 10% of the bond value (though this will vary).
Bond amount and contract value
The amount of the Bond is typically related to contract value (for example, 5‑10 %) and the Bond may remain throughout the defects/maintenance period. You should check your contract to see what the employer demands.
Bond wording and type
Whether the Bond is “conditional” (employer must prove your default) or “on‑demand” (employer can call without proof) affects pricing and risk for you. On‑demand Bonds cost more.
Make sure you understand the exact wording before accepting.
Cashflow impact
While you pay the Bond cost up‑front (or early), you retain most of your cash‑flow (unlike retention which ties up vital working capital at project commencement).
Negotiation and clarity in the contract
When tendering, it can be beneficial to discuss with the employer how the Bond cost is treated. If a Bond is required, it may be worth clarifying whether the cost is compensated by you in pricing, or if there is flexibility in alternative security (for example, Retention Bonds) or lower Bond value given your performance record.
Timely application
The sooner you apply for the Bond, the better. CG Bonds notes that formal quotations are often provided in 5‑7 working days once full information is submitted.
How CG Bonds Help Contractors
Working with CG Bonds as your Surety Bond broker simplifies the process:
We specialise in Performance Bonds (also called Contract Guarantee Bonds) and know the construction sector. We also access a wide underwriting panel, which lead to competitive premiums and improved terms (especially beneficial if you’re an SME contractor).
Our team of dedicated account managers will guide you through the application, support with documentation, and help ensure you’re ready for the tender processes. This supports your cash‑flow planning and risk management.
Fill in our application form to start your Performance Bond application.
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.
