The terms of most performance bonds are usually onerous for the Contractor because they are usually designed as a substitute for the Developer’s cash-in-hand.1 Where the bond is “on-demand”, the bond-issuing bank must pay upon the receipt of a demand by the Developer without any need for inquiry into the merits of the call. It does not always happen that way; however, that is the way the performance bond is designed to function and how it usually does among banks that are mindful of their reputations.

Additionally, performance bonds can be a costly project overhead for the Contractor, costing as much as 3% of the bond’s face value and sometimes more. And they can be assignable, meaning that the assessment of the Developer’s risk-appetite will not necessarily apply in the event the Developer itself becomes cash strapped.

Costly though they are, on-demand bonds are something that a contractor wishes to maintain for the fullness of their useful life (or lives where replacements are required) – that is to say, usually a contractor does not