What is performance security (performance bank guarantee)?
Performance security is the security a winning contractor gives the client, often as a performance bank guarantee, that the contract will be carried out; the client can claim it if the contractor fails, and returns it once the obligations it covers, often including the defect liability period, are complete.
Also called performance bank guarantee, PBG, contract performance security.
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Performance security in plain words
Performance security is furnished after the award, by the date the tender or contract sets. It can be a bank guarantee, and central government rules have also allowed other instruments such as insurance surety bonds. Its size is set in the tender: for works, rule 171 of the General Financial Rules 2017, as amended in 2023, keeps performance security plus security deposit or retention money together at 3 to 10 per cent of the contract value (Department of Expenditure Office Memorandum of 29 December 2023), and CPWD General Conditions of Contract 2019 set it at 5% of the tendered amount.
Why does performance security matter?
A performance bank guarantee uses the contractor's banking limit for the life of the contract and often the defect liability period after it. Limit tied up in guarantees is limit that cannot fund working capital, and a guarantee kept open past its release date costs a fee for nothing.
Where does performance security mislead?
The percentage, the accepted instruments, the validity and the release event are set by each tender and contract, and the government rules have been amended more than once, including a temporary reduction to 3% for contracts and tenders up to 31 December 2021 (Department of Expenditure Office Memorandum of 12 November 2020). Check the current text of the General Financial Rules, the tender and your contract before relying on any figure here.
What do people get wrong about performance security?
- Letting the guarantee run out before the obligation ends
- A client facing a guarantee that is about to expire may ask for an extension or claim it, depending on the guarantee's wording. Track the expiry date against the event the contract names, not against the calendar alone.