Performance Bond

A performance bond is a security instrument issued after contract award — unlike a bid bond which precedes it. The bond is typically issued by a bank or surety insurer for a percentage of the contract value (commonly 5% to 10%) and remains in place throughout the contract term, or until practical completion in the case of construction. If the contractor fails to perform to the required standard or abandons the project, the authority can call on the bond.

Performance bonds are near-universal in public construction and infrastructure contracts globally. They are also required in many large services contracts, particularly where transition risk is high (e.g., IT system migrations or outsourced public services). Development bank procurement guidelines typically mandate performance security at values their borrower governments may then incorporate into national procurement rules.

For vendors, the cost of a performance bond — typically 0.5% to 2% of the bond value per annum in bank fees — must be priced into bids. Smaller companies may find it difficult to obtain bonds if they lack the banking relationship or track record. Alternative instruments such as parent company guarantees or retention mechanisms may be negotiable in some contracts. Understanding exactly when the bond can be released (practical completion, final account, defects period expiry) is important for cash flow management.