PERFORMANCE SECURITY

SUB-CLAUSE 4.2 OF FIDIC RED BOOK – PERFORMANCE SECURITY

 A performance bond is commonly used in the construction industry as a means of insuring a client
against the risk of a contractor failing to fulfil contractual obligations to the client. Performance
bonds can also be required from other parties to a construction contract.

 Whether or not a performance bond is required will depend, in the main, on the perceived financial
strength of the party bidding to win a contract, as the most common concern relates to a contractor
becoming insolvent before completing the contract. Where this occurs the bond provides
compensation guaranteed by a third party up to the amount of the performance bond.
 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, for
example, finding a new contractor to complete the works.
 The obligation for the contractor to provide the client with a bond is set out in the tender documents.
The choice of bondsman and terms with regard to cost falls entirely to the contractor who secures
it prior to the start of work. From a client viewpoint it is wise to stipulate that the bond stays in
place until the end of the defects liability period when the final certificate is issued.

 The Contractor shall deliver the Performance Security to the Employer within 28 days after
receiving the Letter of Acceptance and shall send a copy to the Engineer. The Performance Security
shall be issued by an entity and from within a country approved by the Employer.
 The Contractor shall ensure that the Performance Security is valid and enforceable until the
Contractor has executed and completed the Works and remedied any defects (i.e. the Performance
Security shall be valid until the end of the Defects Liability Period)
 If the terms of the Performance Security specify its expiry date, and the Contractor has not become
entitled to receive the Performance Certificate by the date 28 days prior to the expiry date, the
Contractor shall extend the Performance Security until the Works have been completed and any
defects have been remedied.
 The Employer shall return the Performance Security to the Contractor within 21 days after
receiving a copy of the Performance Certificate.
 Without limitation to the provisions of the rest of this Sub-Clause, whenever the Engineer
determines an addition of reduction to the Contract Price (as a result of a change in cost and / or
legislation or as a result of a variation amounting to more than 25% of the portion of the Contract
Price), the Contractor shall, at the Engineer’s request, promptly increase or may decrease, as the
case may be, the value of the Performance Security by an equal percentage.