Performance Bond

What is a Performance Bond?

A performance bond (also called a performance guarantee or bank guarantee) is a financial instrument provided by a supplier to a government agency as security that the supplier will perform the contract in accordance with its terms. If the supplier fails to deliver, the agency can call on the bond to recover its losses, up to the bond amount.

How Do Performance Bonds Work?

The bond is typically issued by the supplier’s bank or an insurance company and operates as follows:

• The bond amount is usually set as a percentage of the contract value — commonly 5% to 10% for government contracts
• The bond is unconditional — meaning the agency can call on it without needing to prove the supplier’s breach in advance (though this varies by contract)
• The bond is held for the contract duration plus a defects liability period, after which it is released
• If the agency calls the bond, the issuing institution pays the bond amount, and the supplier must then reimburse the institution

When is a Performance Bond Required?

Performance bonds are commonly required for:

• Construction and infrastructure contracts — where the financial exposure from non-performance is significant
• Major ICT implementations — particularly where milestone-based delivery creates risk
• Supply contracts for critical goods — where late or defective delivery would cause substantial loss
• Any high-value contract where the agency needs financial assurance beyond the supplier’s reputation

Cost Considerations

Performance bonds are not free — the supplier pays the issuing institution a fee, typically 1-3% of the bond amount per annum. This cost is a legitimate tender expense that should be factored into pricing.

Tips for Tenderers

• Check bond requirements early — ensure your bank or insurer will provide the required guarantee before you bid.
• Factor the cost into your pricing — bond fees are a real cost of doing business with government.
• Understand the release conditions — know when and how the bond will be returned after contract completion.
• Consider the impact on your credit facilities — performance bonds typically reduce your available borrowing capacity.