Performance bond clause: sample, and on demand against conditional

Sample clause

Written for a road upgrade contract between a fictional regional council and Keystone Civil, a fictional civil contractor.

Performance Security. (a) Within 14 days after the Contract Date, the Contractor must give the Principal a performance bond for 10% of the Contract Sum, issued by a bank or insurer approved by the Principal, in the form in Schedule 6. (b) The Principal may make a demand under the bond only to recover amounts it is entitled to under this contract, and must first give the Contractor 5 business days' written notice stating the amount and the reason. (c) The Principal must return the bond within 20 business days after the Date of Practical Completion, or after any later date by which all amounts due from the Contractor have been paid. (d) If the bond would expire before it is due to be returned, the Contractor must replace it at least 20 business days before expiry, failing which the Principal may call the full amount and hold it as cash security.

Sample wording, not legal advice.

Variants

What to negotiate

• Amount and expiry

  Ten percent of the contract sum is a common performance bond amount in Australia and the UK, sometimes reducing at practical completion. US federal construction under the Miller Act generally requires performance and payment bonds for contracts above a threshold. Contractors should resist a bond that runs well past completion, and ensure it has an expiry date or a clear return trigger, because an open bond ties up credit lines.

• Calls in bad faith

  An on demand bond pays when the client asks, so the contractor's protection is in the contract: a requirement to give notice before calling, and a restriction that the client may call only for amounts it is entitled to. Courts in Australia and the UK will generally restrain a call only for fraud or a clear breach of such a restriction, so the drafting does the real work.

• Who issues it, and the cost

  Banks issue bonds against the contractor's credit facilities, reducing what it can borrow. Insurers and surety companies issue them for a premium. The client should name acceptable issuers by credit rating, and the contractor should price the cost into its tender, because a 10% bond on a large contract is a real expense.

The risk of leaving it out

Without performance security, a client whose contractor collapses mid project has only an unsecured claim against an insolvent company, while it pays another contractor to finish the work. On a public road contract, that can mean months of delay and costs the ratepayers carry. For contractors, bonds are a cost of tendering for larger work.

On demand and conditional bonds compared

An on demand bond pays when the client makes a compliant written demand, without proving any breach. It is fast and certain for the client and risky for the contractor. A conditional bond pays only once default and loss are established, which protects the contractor but can take months. On demand bonds are standard in Australian construction and common in international contracts; conditional bonds are more common in the UK private sector and with US surety bonds, where the surety may investigate and arrange completion rather than simply pay. Law checked on 21 October 2026. This page explains how the clause works and is not legal advice.

Performance bonds in the United States

In the US, performance bonds are typically issued by surety companies rather than banks, and on federal construction the Miller Act, at 40 U.S.C. section 3131, requires a performance bond and a payment bond before a contract above a dollar threshold is awarded. A surety that receives a valid claim may finance the original contractor, take over the work, or pay. Many states have similar laws for state public works, often called little Miller Acts.

Bonds and bank guarantees

In Australia, contractors often provide unconditional bank guarantees rather than insurance bonds, and the two are treated in much the same way: both are on demand instruments. The bank guarantee clause page covers the Australian practice in detail, including leases. The drafting points are the same: the amount, notice before a call, return on time and replacement before expiry.

Writing the schedule

Attach the agreed form of bond as a schedule so the issuer's wording cannot change the deal. The form should state the beneficiary, the amount, whether it is on demand or conditional, the expiry, and how a demand is made. Ask the contractor's bank or surety to confirm it will issue in that form before the contract is signed, since some issuers will only use their own wording.

Documents that carry this clause

Subcontractor agreement template that flows the head contract downA subcontract exists to pass the head contract's obligations down one level and move the money back up on time. This one names the scope by drawing, sets the progress claim dates against the security of payment rules, holds retention and states the insurances, so the trade knows exactly when it is paid and for what.Roofing contract template with a materials table and a weather ruleA roof replacement is the one job where the house is open to the sky at the end of the day, so the clause that matters most is the one about closing it. This contract limits how much roof can be stripped at once, names every product with its warranty years, and says who pays when water gets in.Master services agreementA data consultancy and an insurer sign this once and then buy work under it for three years. It is the rare contract whose whole purpose is to make the next twenty contracts short.

Questions people ask