Performance Bonds

What is a performance bond?

A performance bond is an unconditional undertaking from an A-rated insurer guaranteeing that a contractor will complete a project according to the terms of the contract. If the contractor defaults, the principal can call on the bond to recover their losses — up to the face value of the bond.

Performance bonds are the cornerstone of any surety facility. They're required on virtually all government construction contracts and most major private sector contracts in Australia, typically covering 5–10% of contract value under standard AS2124 or AS4000 wording.

How performance bonds differ from bank guarantees

A bank guarantee and a surety performance bond provide identical contractual security — same wording, same unconditional and on-demand terms. The difference is entirely in how they're funded.

A bank guarantee requires dollar-for-dollar collateral. A $5M bank guarantee means $5M in cash deposits, property security or reduced borrowing capacity. A surety performance bond is unsecured. The surety provider takes only a Deed of Counter Indemnity — a contractual right of recourse, not a registered security interest over your assets.

This means your bank facilities remain available for operational lending, equipment finance and working capital. Your assets stay unencumbered. And the annual cost typically sits at 1–2% of bond face value, roughly a third of the effective cost of a bank guarantee.

Who needs performance bonds?

Any contractor or subcontractor tendering for government or major private sector construction, infrastructure or mining contracts. Most head contracts and many subcontracts require performance security as a condition of award. Without a surety facility, contractors are limited to the bonding capacity their bank is willing to provide — which directly constrains the size and number of contracts they can pursue simultaneously.

How they work under a surety facility

Once your facility is established, issuing a performance bond against a new contract takes 24–48 hours. You provide the contract details and required bond wording, and the bond is issued within your pre-approved limit. No separate credit approval, no additional security, no impact on your bank facilities.

As projects reach practical completion, performance bonds are either released or converted to maintenance bonds — freeing up capacity within your facility for new work. Active bond management by your broker is critical to ensuring your facility capacity is always available when you need it.

The commercial impact

A contractor holding $10M in bank-backed performance guarantees has $10M less borrowing capacity available for equipment, hiring and growth. Replacing those with surety bonds releases that capital immediately while maintaining identical security for the principal.

One BCS client, a formwork contractor, credited surety bonds with enabling growth from $30M to over $100M in turnover. The capital that was previously locked in bank guarantees was redeployed into equipment, people and project capacity.

‍