Bonds are a means of protection against the non-performance of the contractor.

They are an
undertaking by a bondsman or surety to make a payment to the client in the event of non-
performance of the contractor. The cost of the bond is usually borne by the contractor, albeit, this is
likely to be reflected in the contractor's tender price.

Bonds can be 'on demand' or 'conditional', with conditional bonds requiring that the client provides
evidence that the contractor has not performed their obligations under the contract and that they
have suffered a loss as a consequence.

Performance bond

A performance bond is commonly used as a means of insuring a client against the risk of a contractor
failing to fulfil contractual obligations to the client, although they can also be required from other
parties.

Performance bonds are typically set at 10% of the contract value. This compensation can enable the
client to overcome difficulties that have been caused by non-performance of the contractor, such as,
finding a new contractor to complete the works.

Advance payment bond

If the client agrees to make an advance payment to the contractor, (for example where the
contractor incurs significant start up and procurement costs before construction begins), a bond may
be required to secure the payment against default by the contractor. This will normally be an on-
demand bond.

Off-site materials bond

It can sometimes be appropriate for the client to pay for items even though they remain ‘off-site’,
for example, where a contractor has made a large payment for plant or materials that have yet to be
delivered to site, or if the client wishes to ‘reserve’ key items in order to protect the programme.

This is similar to the situation where an advanced payment is made in that a bond secures the
payment against default by the contractor and is likely to be an on-demand bond. The bond might
be up to the value of the off-site items, with the value of the bond reducing as deliveries to site are
made.

Bid bond (or tender bond)

Bid bonds are rare in the UK, but can be a requirement of an international tender process. They are
usually on-demand bonds submitted with a tender to secure the tender's commitment to commence
the contract. The bond is partially or fully forfeited if the winning tender fails to execute the contract
or meet other specified conditions.

Bid bonds can be open to abuse by the client and may prevent smaller companies from tendering.
Retention bond

Retention is a percentage (often 5%) of the amount certified as due to the contractor on an interim
certificate that is retained by the client. The purpose of retention is to ensure the contractor
properly completes the activities required of them under the contract. Half of the amount retained is
released on certification of practical completion and the remainder is released upon certification of
making good defects.

An alternative to retention is a retention bond, where the client agrees to pay the amounts which
would otherwise have been held as retention, but instead a bond is provided to secure the amount
that would have been retained. As with retention, the value of the bond will usually reduce after
practical completion has been certified.