Performance Guarantee / Performance Bond

A performance guarantee, also called a performance bond, is a financial security the winning bidder provides to the buyer shortly after contract award, which the buyer can call in full or in part if the contractor fails to perform the contract as required, protecting the employer against the cost of non-delivery or remediation.

What is a Performance Guarantee / Performance Bond?

Once a bidder wins a contract and the bid-security-bid-bond is returned, the next obligation is to post performance security. The amount is normally specified in the bidding documents as a percentage of the accepted contract price, commonly between 5 and 10 percent for goods and works contracts, though some jurisdictions and contract types set higher thresholds. The security takes the form of an unconditional bank guarantee or a performance bond from a surety company, and it must be submitted within the time stated in the contract, frequently 14 to 28 days after contract signature.

The performance guarantee remains in force for the full duration of the contract and any defects liability period, typically 12 months after practical completion. If the contractor abandons the works, fails to meet key milestones after notice, or is terminated for cause, the employer can call the guarantee to cover the cost of engaging a replacement contractor or remedying defective work. Development banks and major institutional buyers such as those using epc-contract-engineering-procurement-construction frameworks routinely require performance guarantees as a standard contract condition. The guarantee is released and the security document returned when the employer formally certifies that the contractor has fulfilled all obligations including the defects liability period.

Why Performance Guarantee / Performance Bond matters for bidders

A performance guarantee is a direct balance-sheet impact: it reduces available credit lines for the duration of the contract. Firms that carry multiple simultaneous contracts must plan their guarantee capacity as carefully as their working capital. Banks issuing unconditional on-demand guarantees treat them as contingent liabilities, so the credit facility headroom must exist before bid submission, not only after award. Bidders who win contracts and then discover they cannot arrange the required guarantee within the contractual deadline risk having their contract terminated and their bid security called, a double loss. The discipline is to confirm guarantee capacity with your bank before submitting any bid on a contract where performance security will be required.

FAQ

When must a performance guarantee be submitted?

Typically within 14 to 28 days of contract signature, as stated in the special conditions of contract. Missing this deadline can give the employer grounds to terminate the contract.

Can the employer call a performance guarantee without notice?

Most international standard forms require an unconditional, on-demand guarantee, which means the employer can call it without proving a breach in the first instance. The contractor's recourse is through dispute resolution after the call, not before.

Is the performance guarantee returned at the end of the contract?

Yes. Once the employer issues the certificate of completion and any defects liability period expires without outstanding claims, the guarantee is released and the original security document returned to the contractor.