Performance Guarantee

A Performance Guarantee (also called a Performance Bond) is a financial instrument issued by a bank or surety on behalf of a winning contractor, committing that institution to pay the buyer a stated sum, typically five to ten percent of the contract value, if the contractor fails to perform the contract in accordance with its terms.

What is a Performance Guarantee?

Unlike a bid-security, which covers the pre-award phase and lapses once a contract is signed, a Performance Guarantee becomes active at contract signature and remains in force until the contractor has substantially completed its obligations, often through a defects liability period. The buyer can call on the guarantee without proving loss in detail, making it an unconditional instrument that gives the contracting authority immediate recourse. Most multilateral development bank standard bidding documents specify the form and wording of the guarantee, and deviations from that wording are treated as non-compliant.

The Performance Guarantee is closely related to other contract-phase securities such as the retention-money-guarantee and the advance-payment-guarantee, which together form the financial security package that buyers require for larger works and supply contracts.

Why Performance Guarantee matters for bidders

The cost of obtaining a Performance Guarantee, typically a bank commission of between 0.5 and 2 percent per annum of the guaranteed amount, is a direct project cost that must be priced into the bid. Suppliers should confirm that their bank will issue the guarantee in the form and currency specified in the bidding documents, and within the timeframe required after award, because failure to provide the guarantee by the deadline is generally treated as a failure to sign the contract and results in forfeiture of the bid security. Firms bidding on multiple simultaneous contracts should verify that their bank credit lines can support the aggregate face value of all live performance guarantees.

FAQ

How long does a Performance Guarantee remain valid?

It typically covers the full contract period plus a defect notification or warranty period, often 12 to 24 months after substantial completion, as specified in the particular conditions of contract.

What percentage of contract value is typical?

Most development bank and UN contracts require a Performance Guarantee of five to ten percent of the contract price, though the exact percentage is stated in the special conditions of each contract.

Can a Performance Guarantee be called unfairly?

International contracts commonly use unconditional, on-demand guarantees, meaning the buyer can call payment without providing evidence of breach. This risk underlines the importance of reviewing contract conditions carefully before bidding.