Security
The client wants a performance bond. What does it actually pay out?
The tender says “a performance bond will be required” and most builders read it as a formality. It is a financial instrument you will pay for, backed by your own indemnity, whose wording decides whether it is background comfort for the client or a loaded weapon pointed at your facility.
QScope Team·29 April 2026·5 min read
A performance bond is a promise by a surety or bank to pay the client a sum, customarily around ten per cent of the contract value, that is market habit, not law, if you fail to perform the contract. Its classic job is insolvency protection: if the contractor collapses mid-job, the bond funds the client’s extra cost of getting the work finished by someone else, a day this series covers from the other side.
The same two questions as every bond in this family
Conditional or on-demand. A conditional (default) bond pays when the client establishes an actual default and its loss, the normal instrument for UK building work. An on-demand bond pays on written demand, prove it later, common in international work and occasionally slipped into domestic tenders; for a small firm it converts every serious dispute into a possible raid on your facility, and it is fair to resist or price it. The same split runs through the advance payment bond and the retention bond, this family has one recurring plot.
The counter-indemnity. The surety takes no ultimate risk on you: if the bond pays, the surety recovers from you under the indemnity you signed, sometimes personally guaranteed. A bond does not transfer your performance risk anywhere; it transfers the client’s credit risk on you, while you pay the premium for the privilege. Say that sentence to yourself before agreeing one cheerfully.
What it costs, and what to check in the wording
The premium is an annual percentage of the bonded sum, priced on your accounts and track record, quotes, not folklore, and the bonded amount sits on your surety facility, which is finite. In the wording, four things: the cap (it should be a fixed sum, not open-ended); the expiry, ideally at practical completion or making good, with a hard date, because bonds without expiry haunt facilities for years; what counts as default, insolvency and established breach, not mere allegation; and the release mechanics, chased by you at expiry like every other security in this series, sureties cancel nothing unprompted.
When to give one, and when to push back
Give one when the job is big for you, the client is process-driven (public bodies, funders demand them), and the premium priced into your tender still leaves the job worth having. Push back when the ask is on-demand wording, uncapped, or plainly disproportionate to the job, and remember pushing back has a market price: some tenders are bond-or-no-bid, and then the question is only whether your price carries the cost. On domestic work a bond is rare enough that the appearance of one in a homeowner’s contract usually deserves the proportion conversation rather than a signature (section 106 having no bearing on bonds, they are pure contract).
What to do this week
1. If a tender demands a bond, get the draft wording now and run the four checks: cap, expiry, default definition, on-demand or conditional.
2. Price the premium and the facility usage into the tender, visibly in your own build-up, so the bond is a cost, not a surprise.
3. Sweep old jobs for bonds that never got released, and chase the expiries, your facility is paying for every one still technically live.
Where the information stops
Bond wordings and counter-indemnities are short documents that move company-threatening risk in single clauses, and any personal guarantee element changes what you are really signing; both go past your broker or solicitor before signature, every time, and the hour costs less than the premium.