Performance bond
A performance bond is security provided by a contractor or exporter so that the employer or buyer has a bank or surety undertaking if the works or supply contract is not performed as required. In international bank practice the instrument is frequently a demand guarantee labelled as performance security; older and US-influenced forms may instead be surety performance bonds issued by bonding or insurance companies.
Performance bond use on bank export finance desks
On EF desks a performance bond, or performance demand guarantee, is standard credit support on capital-goods exports, EPC contracts and construction packages. It usually replaces or follows a bid bond once the contract is awarded. World Bank Standard Bidding Documents require the successful bidder to furnish performance security within twenty-eight days of notification of award, using the prescribed forms or another form acceptable to the employer.
FIDIC's MDB Harmonised Conditions, Sub-Clause 4.2, require the contractor to deliver a Performance Security to the employer within 28 days after receiving the Letter of Acceptance, in the amount stated in the Contract Data and issued by a reputable bank or financial institution in the stipulated form. Failure to furnish the security can annul the award and forfeit the bid security.
Mechanics, amount and governing rules
Where the performance bond is a bank demand guarantee, the text often incorporates URDG 758, the ICC Uniform Rules for Demand Guarantees. Payment then follows a complying demand and any required supporting statement or documents, independent of proving the underlying dispute to the guarantor. Amounts are set in the contract data or bidding documents rather than by a single global percentage. FIDIC requires validity to run until the works are completed and defects remedied, with extension where an expiry date would otherwise fall before the contractor becomes entitled to the Performance Certificate.
Surety-style performance bonds operate differently: the surety may have options to complete the works or pay up to the bond amount after default conditions in the bond form are met. World Bank bidding instructions expressly contemplate either a bank or financial-institution guarantee or a bond from a bonding company, so desks must read the required form before classifying risk and capital treatment.
Performance bond versus bid and advance-payment security
A bid bond supports the tender process and is released when the contract is signed and performance security is furnished. A performance bond supports execution and defect liability. An advance payment guarantee supports repayment of sums paid before work is earned. All three are commonly issued as independent demand guarantees under the same URDG framework, with different triggers and reduction wording, and a retention guarantee can follow later to substitute for cash retention after taking over.