Is it reasonable and market standard for a performance bond guarantor to restrict liability to pay until after completion of the guaranteed works?

Question

Context is the works are a key subcontract package procured by a main contractor under NEC terms.
What happens if the works are never completed due to performance failure of the party undertaking them?

Tom Spilsted · Answer

I think this question brings us to a wider point on performance bonds. As the majority of performance bonds in current usage are default bonds where the default has to be demonstrated with evidence to satisfy the bond conditions, as opposed to on demand bond where simply a letter of demand is issued and payment expected, this type of bond is more common for advance payment bonds.
My experience of trying to recover from bonds has usually been when it has been an insolvency situation and a replacement subcontractor or main contractor has been appointed to complete the works.
In these circumstances the bond provider has always wanted some evidence that the works are complete and hence the liability ceased, where of course this gets complex is if there is an ongoing latent defects liability which clearly wouldn’t have materialised at say subcontract package completion.
I personally haven’t seen a situation where the bond provider even considers on account payments. As always the key is good records and regular - monthly updates on costs with evidence of actual rather than just forecast costs.
Often a commercial decision has to be made to draw a line under the remaining futrure liabilities and just recovery the incurred costs to a point in time, that way you stand a better chance of success in my view.

Is it reasonable and market standard for a performance bond guarantor to restrict liability to pay until after completion of the guaranteed works?

pay

liability

performance

bond

completion

Steve Hardy

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