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Surety bonds
A performance bond is a guarantee, from a surety or bank, that the employer will be compensated up to a fixed sum if the contractor fails to perform the contract. Employers often make one a condition of awarding work, so contractors without bonding capacity can lose tenders.
Part of: Bonds and surety
In short
A performance bond involves three parties: the contractor, the employer who benefits, and the surety or bank that issues it. If the contractor defaults, the employer can call on the bond up to its value, which is often set at around 10% of the contract sum, though contracts vary. Default bonds require the employer to prove breach and loss; on-demand bonds pay on a compliant written demand. When an insurer issues a performance bond for a premium, it is insurance business under UK law. The surety then recovers what it paid from the contractor under a counter-indemnity.
The contractor (the principal) arranges the bond, the employer (the beneficiary) holds it, and the surety or bank (the guarantor) promises to pay the employer up to the bond amount if the contractor fails to perform. The bond usually expires at a set event, commonly practical completion or the issue of a completion certificate, though the wording decides.
The bond amount is often expressed as a percentage of the contract sum. Around 10% is commonly seen in UK construction, but employers set their own requirement and it can be higher or lower. The bond is not insurance for the contractor: if the surety pays, it will expect the contractor to repay it.
Other bonds work in a similar way: advance payment bonds protect money paid upfront, retention bonds replace cash retentions, and maintenance bonds cover the defects period.
The most important question about any bond is what the employer must show before it is paid.
| Default (conditional) bond | On-demand bond | |
|---|---|---|
| Trigger | The employer must establish the contractor's breach and the resulting loss | A written demand that complies with the bond's terms |
| Amount paid | The proven loss, up to the bond amount | The amount demanded, up to the bond amount |
| Risk to the contractor | Lower; the employer must prove its case | Higher; payment can be made before any dispute is resolved |
| Commonly issued by | Sureties, and banks | Banks, and sometimes sureties for some contracts |
| Where seen | Much UK domestic construction | International contracts and some public and private employers |
Many bonds sit between the two, for example requiring a demand plus a certificate or statement of default. Read the trigger wording before you agree to it, because it decides how easily the bond can be called. Overseas, an unfair call on an on-demand bond is a real risk; UK Export Finance's Bond Insurance Policy covers unfair calls and calls caused by certain political events, as its product guide explains.
Performance bonds come from two main sources: banks, under their banking business, and insurers, as surety. Under Schedule 1 to the Regulated Activities Order the suretyship class of general insurance includes "fidelity bonds, performance bonds, administration bonds, bail bonds or customs bonds or similar contracts of guarantee", where the issuer does not carry on banking business, the bond is not merely incidental to another business, and it is issued for a premium.
The practical difference is security. A bank usually issues a bond against your banking facilities, and may ask for cash collateral; the UK Export Finance Bond Support Scheme page notes that banks typically ask for collateral, often a cash deposit. A surety more commonly relies on its assessment of your business and a counter-indemnity, so the bond may not reduce your borrowing headroom. Our comparison of surety bonds and bank guarantees goes into this.
A surety is underwriting your ability to finish the job and repay it if things go wrong. Expect questions on:
Firms that bond regularly may be offered a facility, an agreed capacity for several bonds, rather than applying contract by contract. Some sureties will not issue on-demand wording at all, or only for stronger clients, so raise the wording early in a tender.
Illustrative: a fit-out contractor on a £2 million contract with a default bond of £200,000 runs into cash flow problems and leaves site. The employer terminates, appoints a replacement contractor at a higher price and claims the extra cost and delay from the bond. Under a default bond, the surety asks for evidence of the breach and the loss. It pays the proven amount, up to £200,000, then pursues the contractor, and anyone else who signed the counter-indemnity, for repayment.
Had the bond been on-demand, the employer might have been paid on a compliant demand without proving its loss first, leaving the contractor to dispute the amount later.
Bonding is separate from insurance against physical damage or liability; see our construction insurance guide, contractors' insurance and JCT insurance options.
In its Time to Pay Up response of 24 March 2026 the government said it proposes to prohibit cash retentions in construction contracts, subject to further consultation, and will work with the financial services sector to develop the surety market for construction. If retentions are banned, some employers may look to bonds for the protection retentions gave them. As at October 2026, no ban is in force.
Subcontractors exposed to a main contractor's failure can also consider trade credit insurance.
Apex arranges surety bonds and trade credit insurance. A broker reads each enquiry and comes back with options; there is no fee for a quote, and any bond is subject to the insurer's acceptance and the bond terms. To quote we need your business activities, turnover, location and claims history, plus your last two years' accounts and current management accounts, the contract and bond wording required, contract value and duration, and your work in hand. Our surety bonds guide, bonds and surety and performance bond definitions give more background.
It is a guarantee issued by a surety or bank to the employer, promising to pay up to a fixed sum if the contractor fails to perform the contract. The contractor arranges it, often as a condition of being awarded the work, and must usually repay the surety if the bond is called.
It is usually a percentage of the contract sum set by the employer. Around 10% is commonly seen in UK construction, but it can be higher or lower depending on the contract, the employer and the risk. The required amount should be stated in the tender documents or contract.
A default bond pays only once the employer establishes the contractor's breach and the loss it caused. An on-demand bond pays on a written demand that complies with the bond's terms, without proof of loss first. On-demand bonds carry more risk for the contractor.
Banks and insurers. Banks issue bonds as part of their banking business, often against facilities or cash collateral. Insurers issue them as surety, which UK law treats as a class of general insurance when bonds are issued for a premium by a business that does not carry on banking.
Possibly. Sureties usually require a counter-indemnity from the contracting company, and often its parent. For smaller or newer companies they may also ask directors to sign personally. Read the indemnity carefully and take legal advice before signing.
Tell us what your business does, your turnover and any claims. A broker reads every enquiry and comes back with options. No fee for a quote. Or call 0117 325 0027.
Start a commercial enquiry Request a callbackApex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales, company number 07014570. This page is general information, not advice on your individual circumstances, and it does not guarantee that cover will be available or on what terms.
