Category: Contracts & management
Prepared by Eng. Ahmed Fathy, Projects Manager ·
Definition
A performance bond is financial security the contractor provides to the owner, as a percentage of the contract value, which the owner can call if the contractor fails its obligations.
Why it matters on a project
Its terms, duration and release conditions must be read before pricing, because it ties up the contractor's capital or credit line for the whole project.
Measurement and pricing
Its percentage is set in the conditions, and its cost is priced in indirect costs.
Common mistake
Not tracking the bond's expiry and release after handover.
Frequently asked questions
When is the performance bond released?
As the contract says, usually after taking-over or after the defects period.
Can an alternative to the bond be agreed?
Alternatives such as higher retention or payment on completed milestones can be negotiated, if the owner accepts.
Related terms
- Advance paymentAn amount paid to the contractor at the start and recovered from payments.
- RetentionA percentage withheld from each payment and released after handover or the defects period.
- Tender documents (conditions)The documents defining tender conditions, specifications and evaluation criteria.
- Indirect costs (overheads)Site and head-office costs not attributable to a single item, added as a percentage.
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