Performance guarantees for construction contracts

What a performance guarantee is

A performance guarantee is security for the employer. If the contractor does not perform the contract as required, the employer may make a demand on the guarantee. The issuer’s obligation to pay depends on the wording, not on a general view of who was right.

The contract states the amount, which is often expressed as a percentage of the contract value, and when it must be delivered. The employer’s documents often include the required wording, and issuers are usually asked to follow it closely.

Some guarantees are payable on written demand without the employer having to prove default. Others are conditional, requiring evidence of default or an adjudication outcome before payment. The wording determines which applies, and the difference matters to the contractor’s risk.

When a performance guarantee comes up

After a tender is awarded and the contract requires security before the contractor starts or receives its first payment.
When a public body or developer prescribes a guarantee form in its documents.
When a main contractor requires security from a subcontractor for a significant package.
When a contractor wants to substitute one form of security for another, if the contract allows it.

What to check in the wording

Amount: The maximum the guarantee can pay. It should match the contract. Check whether the amount is fixed or reduces.
Expiry and validity: The date or event on which the guarantee ends. If the programme extends, the guarantee may need to be extended before it expires.
Conditions for a claim: Whether the employer can call it on demand, or only after specified conditions are met, and any documents the employer must provide.
Beneficiary: The employer’s correct legal name, and whether assignment to other parties is permitted.
Release and return: When the guarantee ceases to be required and how the original document is returned to the issuer.
Governing terms: Any reference to the contract, the law that governs the guarantee and how disputes are handled.

Important limitations and obligations

Repayment: If the issuer pays the employer, it will normally require the contractor to reimburse it under the counter-indemnity. A guarantee does not remove the contractor’s liability. It moves who pays first.
Security and indemnity: Issuers may require security such as deposits, sureties or personal indemnities from directors. Read these obligations carefully before you sign.
Cost and capacity: Providers charge for guarantees and may set overall limits for each contractor. Taking on guarantees for one contract can limit what is available for the next.
Timing: Assessment takes time. The need to deliver a guarantee quickly after award is a common cause of pressure, so prepare early.
No assurance of issue: No guarantee is arranged or issued until the provider has approved it. We cannot promise an outcome.

The application and assessment process

Share the contract requirement
Provide the contract extract, the guarantee wording and the required amount and dates.
Provide business information
Supply the documents the provider requests. The usual categories are described in our guide to application documents, which is a general guide and not a universal issuer checklist.
Provider assessment
The provider reviews the financial position, the contract and the proposed security, and may ask follow-up questions.
Terms and acceptance
If the provider offers terms, the contractor reviews and signs the counter-indemnity and any security documents.
Issue and delivery
The guarantee is issued in the agreed wording and delivered to the employer. Keep a record of the date and the expiry.

Information we usually need for a quotation

To start a performance guarantee enquiry, we would normally ask for:

The contract or tender extract that describes the guarantee, with the prescribed wording if there is one.
The employer’s name and the contract value and period.
The guarantee amount and when it must be delivered.
Your business registration documents and director details.
Recent financial statements and information about work in progress.
Evidence of similar completed projects.
Details of any guarantees or other security you already have in place.

You do not need everything on day one. A short description of the work is enough to start, and the quote form only asks for the details relevant to your enquiry.

Frequently asked questions

Is a performance guarantee the same as a performance bond?

The terms are often used interchangeably. What matters is the actual wording: who the issuer is, what triggers payment, the amount and the expiry.

What happens if the employer calls the guarantee?

The issuer pays according to the wording, and the contractor is normally obliged to reimburse the issuer under its counter-indemnity. Disputes with the employer are separate and are dealt with under the contract.

Can I get a guarantee on short notice?

We cannot promise that. The provider needs time to assess the application. Start as early as you can, preferably during the tender stage.

Does it replace Contractors All Risk insurance?

No. A guarantee secures performance of the contract. Insurance addresses accidental loss or damage and third-party liability. See performance guarantee versus insurance.