Why Performance Bonds Matter in Construction Projects


Construction projects are complex, especially when several contractors are involved at various stages. Even short delays or one party not quite doing what was promised can have a big knock-on impact on the project as a whole, which can end up being very costly and stressful to deal with. Performance bonds are one way in which developers can manage a key element of risk with their construction project.

Performance bonds in construction are essentially a written guarantee that the contractor will satisfactorily complete the project that they have been engaged for. Sometimes called performance guarantees, surety bonds or contract bonds, a performance bond is an insurance product that ensures if the contractor defaults on their agreement, the beneficiary is able to access funds to mitigate this and can make alternative arrangements to complete the project to the required standard.

The benefits of performance bonds for UK construction projects include:

  • Peace of mind for developers that you’re protected if contractors fail to meet their obligations
  • A way for contractors to strengthen their bids for contracts, by including performance bonds as part of their response to the tendering process and lowering the risk for developers
  • Enables developers to manage finances differently during projects, with no need to ring-fence the working capital that the performance bond covers
  • Compliance for contractors on projects where a performance bond is required, which is common for public sector or housing association projects, amongst others.

Who is responsible for taking out performance bonds?

Contractors or sub-contractors are generally the party responsible for arranging performance bond cover for a project they are going to be working on. The policy will include a set amount that will be paid out to the beneficiary (i.e. the developer running the project) if the contractor doesn’t complete all of their obligations to the standard required.

The sum that is specified by the cover is usually based on an agreed percentage of the full contract value e.g. 10%.

If you are a contractor looking for performance bond cover, we’d love to help. Get in touch for more information by calling 0845 900 3969.

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Advantage Home Construction Insurance (AHCI) provides structural defects insurance – operating nationally with offices in Warrington, London and Birmingham – offering development-related insurances and a service designed to give customers peace of mind.

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