Bonds in construction contracts

Contents
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1 Introduction

2 Performance bond

3 Advance payment bond

4 Off-site materials bond

5 Bid bond (or tender bond)

6 Retention bond

7 Defects liability bond (or defects liability demand guarantee)

8 Adjudication bond

9 Find out more

9.1 Related articles on Designing Buildings Wiki

Introduction
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 nonperformance 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.
NB See also bonds v guarantees.

Performance bond
A performance bond is commonly used as a
means of insuring a client against the risk of
acontractor 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
thecontractor, such as, finding a
new Contractor to complete the works.
For more information see Performance bond.

Advance payment bond

If the client agrees to make an advance
payment to the contractor, (for example where

thecontractor incurs significant start up

and procurement costs before construction
begins), a bondmay be required to secure the
payment against default by the contractor. This
will normally be anon-demand bond.
For more information see Advance payment
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 bondmight 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
fromtendering.

Retention bond
Retention is a percentage (often 5%) of the
amount certified as due to the contractor on
aninterim certificate that is retained by
the client. The purpose of retention is to ensure
thecontractor 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.

Defects liability bond (or defects l

iability demand guarantee)
The defects liability period (now called the
'rectification period' in Joint Contracts
Tribunal (JCT)contracts) begins upon certification
of practical completion and typically lasts six to
twelve months. During this time, it is
the contractor's responsibility to rectify
any defects that become apparent in the works.
A defects liability bond can be used to ensure
that the contractor continues to provide
services, rectifying defects that become
apparent after practical completion has been
certified. This is generally an on-demand
bond that may be required on projects where
there are no remaining payments to be made, or
other security such as retention, after practical
completion.

Adjudication bond

Adjudication is a contractual or statutory

procedure for
swift dispute resolution. Adjudication is provided
by a third party adjudicator selected by the
parties to the dispute.
Adjudication bonds are conditional bonds that
have emerged on PFI/PPP projects and are
payable on
an adjudicators decision. Adjudication bonds are
most suitable when the adjudicators decision is
final and binding. If this is not the case, (ie
the adjudicators decision is an interim one)
complex procedures are necessary ot balance
payments if subsequent dispute resolution
procedures reach different decisions.

Find out more