How Bonds Really Work

Chris Davies
17 hours ago
2 min read

Performance bonds are often described as a box-ticking exercise. Something required by the employer, signed, filed away and rarely revisited. In reality, they are one of the most powerful (and misunderstood) tools in UK construction risk management. At their best, performance bonds protect projects, preserve cashflow and strengthen commercial relationships. At their worst, poorly structured bonds create uncertainty, disputes, and unnecessary cost. The difference lies in understanding how bonds really work and in having the right broker in your corner.

A performance bond is not insurance for the contractor, and it is not a guarantee that a project will succeed. It is a financial security provided by a surety (usually an insurance company or bank) in favour of the employer, designed to respond if the contractor fails to meet its contractual obligations. If a valid claim is made, the surety will pay damages up to the bond value (commonly 10% of the contract sum). Crucially, any payout is recoverable from the contractor which is why surety providers underwrite contractors so carefully and why expert structuring matters.

Not all performance bonds are created equal. Small changes in wording can dramatically alter risk exposure.

Key distinctions include:

On-demand vs conditional bonds
Trigger events for claims
Proof requirements and dispute mechanisms
Expiry dates and reduction provisions

Employers often push for the strongest possible wording. Contractors often accept it without realising the long-term implications. A single poorly negotiated bond can restrict a contractor’s ability to bid for future work. A specialist broker like DRS ensures the bond is fit for purpose, commercially balanced and aligned with the underlying contract. All of this is achieved through early engagement, regular communication, and years of industry experience.

The bottom line: performance bonds are not just a contractual obligation. They are a commercial tool that, when structured correctly, support growth rather than restrict it.

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