Bonds FAQs

Questions and answers that relate to Surety Bonds, including what they are designed for, how they are calculated, and how much they cost. This information is provided as a guide only, and if you have any doubts or questions, please call our expert Bonds team on 020 7623 4957.

Why do I need a construction bond now?

The current economic climate has led many employers to include bonds as a contractual requirement for bidding contractors – this was previously only the case on public sector contracts to protect taxpayer funding.

What are the advantages of using a broker to arrange your construction bond?

Long-term issues such as cost inflation and delays to both housebuilding and infrastructure projects have led to more insolvencies and increased financial scrutiny across the construction sector in 2023.

What information will my Surety Broker need?

Working with a construction specialist broker is essential because they can walk contractors through the bonds process. Brokers usually outline in advance the documents required to make a formal submission.

What is a surety or ‘guarantee’ bond?

A surety bond is sometimes referred to as a ‘guarantee bond’, or ‘contract guarantee’.

How are construction bond premiums calculated?

Premiums are assessed on several criteria, including company financial ratings, the type of bond required, and the contract wording.

What types of bond are available?

There are a number of different types of bond available within the UK Construction industry.

How is a bond calculated?

Surety Bonds are normally 10% of the contract value. Retention Bonds are usually between 2.5 and 5% of the contract value, and Advance Payment Bonds are a fixed sum, depending on the advance payment value.

How can I get a quote?

Typically, people will approach a bond specialist, like an insurance broker, who will request information as part of the application.

How much does a bond cost?

The cost of a performance bond depends on the financial strength of the company applying for the bond.

How long does a bond last?

The duration of a bond is agreed between Beneficiary and Contractor prior to the bond being issued. Different bonds are usually in place for different periods.

Can a bond be cancelled?

Unlike a general insurance product, a bond is a legal obligation that cannot be cancelled for any reason, other than its specified expiry provision having been achieved.

What form of wording is typically used in a bond?

There are three commonly used types of bond. Conditional requires that damages need to be established and ascertained by an appointed representative before any bond claim is paid.

How are performance bonds calculated?

In general, you can expect to be asked for details about your current contracts and any work in progress you have. You may also need to supply information about your financial circumstances.

What are performance bonds?

A performance bond is a guarantee, usually issued by a bank or insurance company on behalf of a building company (or a sub-contractor).

When are performance bonds required?

Construction performance bonds are often listed as a requirement in project tender documents, especially among local and regional authority clients.

Who pays for a performance bond?

Although it may be the client who insists on a contractor having a performance bond, the contractor is responsible for arranging and paying for a bond.

Are performance bonds renewable?

Performance bonds are usually tied to a project, so they do not renew. They will remain for the duration of the contract.

What is the advance payment guarantee on a performance bond?

Employers ask contractors to purchase advance payment guarantees because they pay the employers even if the contractor fails to deliver the goods or perform contracted services due to insolvency.

What is the difference between a guarantor and a surety?

From a legal perspective, both guarantors and surety are similar, but in practice, they offer different benefits.

What is the duty of a surety?

Surety bonds have traditionally been used in local authority construction contracts, but they are increasingly incorporated into commercial construction project contracts to guarantee their completion.

What is the difference between a guarantee bond and a surety bond?

Surety bonds and bank guarantees ensure a contractor’s performance and financial commitments on a construction project. They are similar, but there are some significant differences.

Types of performance bonds

There are two main categories: ‘on demand’ bonds and ‘conditional’ bonds.

What are performance bonds for?

They are a type of financial guarantee, in which an insurer or bank guarantees to the client or developer that the contractor will complete a project on time and to the required specification.

What are performance bonds in construction?

Performance bonds are a type of guarantee provided to a client by an insurer, on behalf of the contractor, that the work set out in a contract will be completed to spec and on time.

What do performance bonds cover?

What a bond will cover may partly depend on the nature of the project and the terms of the bond itself. The main purpose is to ensure the client can complete the project if the builder does not or cannot do so.