Performance Security

A Performance Security is a financial instrument, most commonly an unconditional bank guarantee or a surety bond, that a contractor is required to furnish to the procuring entity at contract signing, giving the employer a liquid remedy if the contractor fails to perform its contractual obligations.

What is a Performance Security?

Unlike a bid security, which secures the bidding process, a performance security secures the entire execution of the contract. It is typically set at five to ten percent of the contract price, is unconditional on demand (meaning the employer can call it without proving the contractor is in default in court), and must be issued by a bank or surety acceptable to the procuring entity. The security is valid from contract signing through practical completion and, under many contracts, through the end of the defects-liability-period.

Development bank standard bidding documents, including the World Bank's Standard Procurement Documents, specify the required form of performance security, the validity period, and the acceptable issuing institutions. The security is returned to the contractor when the defects completion certificate is issued, confirming all obligations have been met. If the contractor defaults, is terminated, or fails to remedy defects notified during the DLP, the employer may call the security to cover the cost of completing the works or remedying defects using a substitute contractor.

The bank-guarantee is the most common instrument used as a performance security in international procurement. A surety bond is an alternative in markets, particularly North America, where surety products are well-developed. Some contracts allow an insurance bond or a cash deposit, though these are less common in development-bank contexts.

Why a Performance Security matters for bidders

The performance security represents a real financing cost and credit risk for the contractor. Obtaining a guarantee of five to ten percent of contract value consumes the contractor's bank credit line for the life of the contract. A contractor with multiple simultaneous contracts must manage its aggregate guarantee exposure against its credit facilities. The practical disciplines are: confirm the required security amount, form, and validity before submitting a bid; check that the issuing bank is on the procuring entity's accepted list; and factor the bank's guarantee fee (typically 0.5 to 1.5 percent per annum of the guaranteed amount) into the contract price.

FAQ

Can a performance security be called without the contractor being formally in breach?

An unconditional (on-demand) performance guarantee can be called by the employer presenting the guarantee to the issuing bank without needing to prove default. This is the standard form in development-bank contracts. The contractor's remedy if the call was wrongful is to sue the employer for damages after the fact.

What is the difference between a performance security and retention money?

A performance security is a third-party financial instrument called on demand in case of default; retention money is a percentage of each payment withheld by the employer from the contractor's own earned revenue and returned at contract completion. Both serve as security for performance, but through different mechanisms.

Does the performance security cover warranty obligations?

If the contract requires the security to remain valid through the defects liability period, then yes. Contractors should confirm the required security validity period in the contract and ensure the issuing bank will maintain the guarantee for that duration before they agree to it.