performance bond

A performance bond is a financial guarantee provided by a supplier to assure the contracting authority that contractual obligations will be fulfilled. Typically issued by a bank or insurance company, it ensures that if the contractor fails to deliver, the guarantor compensates the contracting authority or arranges for the work to be completed.

How does a performance bond work?

A performance bond involves three parties: the contractor, the contracting authority, and the guarantor (bank or insurer). If the contractor defaults, the contracting authority can claim directly against the guarantor.

EU Directive 2014/24/EU does not explicitly regulate performance bonds, but the CJEU clarified in the INGSTEEL case (C-76/16, 2017) that contracting authorities may require them as a selection criterion under Article 58, provided the requirement is proportionate. In practice, bond requirements are set out in contract conditions rather than the tender documents.

Key aspects of performance bonds

• Coverage levels: In works contracts, bond amounts typically range from 5–15 % of the contract value during execution, reducing to a lower percentage during the defects liability period.
• Types of guarantee: The most common forms are bank guarantees, insurance-backed bonds, and parent company guarantees — each with different cost and risk profiles for the contractor.
• Proportionality: Bond requirements must be proportionate to the contract's value and complexity. Excessive requirements can restrict competition by excluding smaller tenderers who struggle to secure large guarantees.
• Cost implications: Obtaining a performance bond typically costs 1–3 % of the guaranteed amount annually, which must be factored into the bid price.

Tools like Cobrief can help suppliers identify guarantee requirements early in procurement documents, ensuring these costs are accounted for in the tender response.

Summary

A performance bond protects contracting authorities against contractor default, while adding a cost that suppliers must plan for. Understanding bond requirements early in the process helps both parties set realistic expectations and supports successful contract delivery.