Performance Bonds

A Contract Guarantee Bond, or otherwise known as a Performance Bond, is a type of security that guarantees the successful completion of a project/scheme by the principle (contractor). A Contract Guarantee Bond, therefore, protects the beneficiary (housing association / developer), from any losses that may arise because of the principle failing to fulfil their obligations within the agreement.

The bond may be called upon if the contractor becomes insolvent or completes the work to an unsatisfactory standard, as detailed in the agreement. The Contract Guarantee Bond represents a sum of money (usually 10% of the contract value), which can be used to complete or improve the contractors’ work. The purpose of a Contract Guarantee Bond is to safeguard the beneficiary from any loss of value on their development.

There are 2 types of Performance Bonds:

Conditional Bonds:
These bonds require the beneficiary to provide evidence that they have suffered a loss, as a result of the principle failing to fulfil their contractual obligations.

On-Demand Bonds:
These bonds can be called upon immediately without having to satisfy any preconditions. The surety will pay an amount of money, as detailed in the contract, without requiring proof of the contractor’s liability. This can only be denied if the beneficiary acts fraudulently. These are much less common in the UK housebuilding industry.

Tri-Party Obligations:

1. Beneficiary issues contract to principle. The beneficiary requires the principle to complete the works to the agreed standard, as detailed in the agreement.

2. Commitment from principle to fulfil their contractual obligations.

3. Represents the principles obligation to pay the surety for the bond.

4. Commitment from surety to pay any outstanding or unsatisfactory works if the principle defaults on their obligations within the agreement.