Do Performance Bonds Have An Expiration Date?

Performance bonds typically remain valid until the conditions specified in the bond are fulfilled. This is often when the works are completed to the satisfaction of the contract terms or when the defects liability period concludes. However, the exact duration of a performance bond is determined by the bond’s wording, which is agreed upon when the bond is issued.

The bond wording will specify whether it expires:

On completion of the works: When the project meets the contract’s requirements.
After the defects liability period: When all identified defects have been rectified.
On a specified date: A fixed period outlined in the bond terms.

The duration and expiry conditions of the bond are negotiated and agreed upon between the contractor, beneficiary, and surety when the bond is established. It is important to note that if the bond wording includes an “on-demand” clause, the bond might still be callable under certain conditions even after completion, depending on local regulations and the contract terms.

If you’re a contractor then a performance bond is a great way to enhance your credibility and to show that you are financially stable and committed to finishing a project. This in turn will give your clients and the project owners peace of mind, as it means their investment will be protected.

Key Features of a Performance Bond

Performance bonds are financial instruments designed to ensure that parties involved in a contract, often in the construction sector, fulfil their obligations as specified in the agreement. These bonds act as a guarantee that a project or job will be completed by the terms and conditions outlined in the contract. For this reason, they are also sometimes referred to as contract guarantee bonds.

Performance bonds offer protection to the project owner or obligee, typically by providing financial compensation in case the contractor or principal fails to meet their contractual obligations. For example, a contractor working with a housing association on a development for a large number of plots will very likely need to offer the housing association a performance bond to guarantee financial security and that the work will be completed according to the agreed terms.

What Happens When a Performance Bond Expires?

Typically a performance bond only expires when there is a longstop date detailed in the bond wording and/or associated contract. A performance bond is tied to the duration of the contract and completion of project milestones as outlined in the agreement.

If there is not a longstop date detailed in the bond, the performance bond remains in place and valid until bond cancellation has been achieved, usually POC (Principal of Completion) or GMOD (Good Maintenance of Defects). The successful completion of the project allows the bond to be released, once all the contractual obligations have been fulfilled.

Can You Extend A Performance Bond?

There are certain circumstances where you may be able to extend your performance bond. The bond may have a clause in its wording that includes provisions for extensions or renewals under certain conditions. Other reasons you may be able to extend a performance bond include:

Extend or Pay Provision

A performance bond may include an extend or pay provision that allows the beneficiary to request an extension of the bond’s validity period, which is useful if a project overruns. In this case, the surety company will typically agree to extend the bond, or, alternatively, they may choose to pay out a claim if the conditions for extension are not met.

Bond Duration

The duration of a performance bond is usually linked to the duration of the contract or the completion of project milestones. If a project overrun occurs, the bond provider may agree to extend the bond’s term. However, this extension is typically subject to additional fees, known as overrun fees, and may involve a reassessment of the contractor’s performance and the project’s status.

Surety companies often consider factors such as contractor performance history, financial stability, and project-specific risks when deciding whether to grant extensions or renewals of performance bonds.

Can You Cancel a Performance Bond Early?

Most performance bonds or guarantees can be cancelled if both parties agree to cancel the bond. However, there may be specific terms and conditions outlined in the construction contract that dictate the process for cancelling the bond.

It is important to review the terms of the bond agreement and consult with an advisory team such as CG Bonds to ensure that the cancellation is done in accordance with the contract.

Performance Bonds and More from CG Bonds

Calculating the length you need for your performance bond, and understanding what happens and what you can do when they expire is important, especially if you are trying to complete the application yourself. CG Bonds can help and work with the employer to understand the exact bond duration and cover required.

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.