Performance bonds have moved from a background item on the risk register to one of the first things employers in England and Wales reach for when a contractor gets into difficulty. Construction was the top sector for company insolvencies in the 12 months to May 2025, with 4,056 cases, or 17% of all insolvencies where the industry was captured. Against that background, the practical question is whether the insolvency bond you hold will actually pay out.
There is often a gap between what employers assume a performance bond covers and what the wording, on a fair reading, actually secures. Closing that gap before the contract is signed is one of the more valuable things you can do on a project of any real value.
The sections below cover how performance bonds work, the difference between on-demand and default bonds, whether insolvency will trigger the bond, the timing errors that sink otherwise good claims, and the steps that give a claim its best chance of success.
Summary
- What is a Performance Bond?
- On-Demand Bonds vs Default Bonds
- The Perar Problem and Contractor Insolvency
- How to Make a Successful Bond Claim
- Timing Errors That Sink Bond Claims
- Common Pitfalls
- Alternatives and Complements to Performance Bonds
What is a Performance Bond or Insolvency Bond?
A performance bond is a financial guarantee, usually from a bank or insurer, protecting you as employer against contractor default or insolvency. If the contractor fails to perform, a conditional bond gives you a route to recover a defined amount of your loss without waiting on the contractor.
The bond is typically 10% of the contract sum. The contractor pays the premium, though the premium is usually built into the tender price, so the economic cost sits with you. Bonds expire at practical completion or at the end of the defect’s rectification period. The ability to make a claim after the bond's expiry depends on the specific terms of the bond. Conditional bonds, for instance, require strict compliance with their terms, including the timing of claims. If a claim is made after the bond's expiry, it is unlikely to succeed unless the bond explicitly allows for such claims.
On-Demand Bonds vs Default Bonds
Two bond structures dominate the market, and the structure decides how quickly you can recover. An on-demand bond pays on the employer's written demand, without any need to prove breach or loss. A default bond requires you to establish contractor liability under the main contract and quantify your loss before the surety pays. Default bonds are the market standard in England and Wales. On-demand bonds are common overseas but rare in UK construction, where sureties resist them and contractors object to the balance-sheet impact.
Where used, an on-demand bond gives real cash-flow protection at the moment you need it. A default bond, sometimes called a conditional bond, gives the surety a defensible position, but if proof of actual loss depends on a replacement contractor finishing the works, you may be funding the shortfall for many months before the bond responds.
One workaround is an interim payment mechanism, triggered by a quantity surveyor's opinion on projected additional cost, with reconciliation once the true numbers are known. If cash flow after insolvency is a genuine concern, raise that mechanism at drafting stage.
The Perar Problem and Contractor Insolvency
Under most standard-form building contracts, contractor insolvency is not, in itself, a breach of contract. The Court of Appeal Perar BV v General Surety and Guarantee Co Ltd (1994) 66 BLR 72 confirmed this: a default bond will typically only respond to a breach. As a work-around to this issue, Insolvency Law Solicitors will typically amend the standard ABI bond wording (still refers to breaches of contract rather than insolvency) to expressly include insolvency as an event of default.
The position was clarified in Ziggurat (Claremont Place) LLP v HCC International Insurance Company plc [2017] EWHC 3286 (TCC). The employer had procured student accommodation at Newcastle University under a JCT Standard Building Contract 2011. The contractor stopped work, entered a company voluntary arrangement, and the employer engaged others to finish. That cost around £621,000, against a bond capped at £382,000 in a form based on the ABI Model.
Justice Coulson held that a breach of contract was not required to trigger the surety's liability under the additional insolvency wording the parties had negotiated into the ABI form. Even if a breach had been required, one was present in any event.
"The failure of the Contractor, following insolvency, to pay the sum due will be a breach of Contract which will be protected by the Bond."
A properly drafted bond will respond to insolvency even without express insolvency wording, provided the contractual accounting has been completed and the debt is unpaid. The surety can still challenge the amount claimed, so the accounting still has to be done properly.
How to Make a Successful Insolvency Bond Claim
Where a bond claim goes wrong, it usually goes wrong on procedure rather than on the merits. A careful, sequenced approach reduces the risk of a well-founded claim being rejected on a technicality.
- Check the bond has not expired and that the demand is being made by the correct party named in the bond.
- Comply strictly with the claim’s procedure: correct form of demand, correct supporting documents, correct address, correct method of service.
- Put the surety on notice of a future claim as early as possible after insolvency.
- Build the strongest evidence you can, linking every additional cost you claim to the contractor's default.
- Consider engaging with the surety before you formally demand, to flag procedural points that could otherwise cause a demand to be returned.
- Complete the final accounting exercise required by the JCT within the contractual timeframe.
It is important to note that the specific requirements for final accounting and their impact on bond claims depend on the terms of the underlying contract and the bond itself.
Timing Errors That Sink Bond Claims
Timing is where most well-founded bond claims come apart. The wording of the bond will usually give you a shot at recovery. The order and speed of your steps decide whether that shot pays out. Three timing errors show up repeatedly in construction insolvency work.
Demanding on the bond before the final account has been prepared
Under the JCT Standard Building Contract, the debt owed after contractor insolvency is ascertained through the accounting exercise in clause 8.7 (or its equivalent in the relevant JCT edition). Until that debt is quantified, there is nothing definite for the surety to pay. Employers who write to the surety in the first weeks after insolvency, quoting an estimated overspend, routinely have the demand returned as premature. The accounting exercise runs alongside the replacement contractor's works and cannot realistically be closed out until final measurement, often nine to twelve months after termination on a mid-sized project.
Waiting too long and finding the bond has expired
A common situation looks like this. Practical completion is reached, the twelve-month defects rectification period runs, and the bond expires six weeks or so after practical completion under its own terms. The replacement contractor's final account is not agreed until several months into that period. The employer only turns to the bond when the debt is finally quantified and finds the bond has already expired. Diary the expiry from day one, put the surety on formal notice inside the bond period even if the exact quantum is not yet known, and, where possible, negotiate an extension of the bond in writing before it expires.
Failing to put the surety on notice promptly
Most bond wordings require notice within a defined window after the trigger event. Even where the bond does not spell out a fixed period, silence damages the claim: the surety can argue prejudice, and the underwriters lose the ability to intervene on the choice of replacement contractor. As a working rule, notify the surety in writing within seven to fourteen days of the contractor's insolvency, before demand. That short letter costs nothing and preserves the position.
In our own work, we have seen each of these errors play out. Qarrar Somji, who leads our dispute resolution team, has acted on JCT Design and Build disputes and multi-adjudication matters running to seven figures, alongside insolvency litigation in the Chancery Division. The bond claims that pay out cleanly are the ones where the accounting under the contract was completed on time, the surety was on notice from the outset, and the demand was held back until the debt was properly ascertained.
Common Pitfalls
Even sophisticated employers make the same handful of mistakes. Watching for these will save you money.
- Assuming insolvency language in the bond is essential. Following Ziggurat, it is helpful but not always necessary.
- Failing to check the bond has not expired before the demand is made.
- Relying on estimated, rather than verified, completion accounts to quantify the claim. The surety will test the numbers.
- Overlooking modern bonding options at the outset, such as fast-track dispute resolution bonds or on-demand insolvency triggers with reconciliation accounting.
- Treating the bond as the complete solution. A bond of 10% of the contract sum will rarely cover the full cost of a mid-project insolvency.
Alternatives and Complements to Performance Bonds
A performance bond is one element of a wider security package, and it works best alongside other protections, including:
- Parent company guarantees, which can provide meaningful cover, but only if the parent itself remains solvent. In a group failure they are worth less than they appear.
- Advance payment bonds, which provide separate security for any sums paid to the contractor before value has been delivered on site.
- Vesting certificates, which protect your ownership of off-site materials on projects with long lead-in items.
- Collateral warranties with step-in rights from sub-contractors and consultants - give you options if the main contractor fails mid-project.
At contract stage the useful exercise is to map out the whole security package and find the gaps before the contractor even mobilises.
Seek Legal Advice
A performance bond is one of the most valuable protections an employer has in a contractor insolvency, but it is only as good as the wording and the way the claim is handled. A well-drafted bond will respond to insolvency even without express insolvency language, provided the accounting is done properly and the claim is presented correctly and in time. The time to scrutinise the bond is before the contract is signed, not after the contractor has failed.
If you are reviewing a bond on a new project or dealing with a live contractor insolvency, our construction law solicitors and insolvency and corporate recovery team can advise on the wording and the claims process. Where a dispute has already crystallised, our commercial disputes solicitors can help you build the claim and manage the accounting exercise. Call us on 0300 303 2071 or use our enquiry form to arrange an initial conversation.
FAQs
Does a Performance Bond Cover All My Losses?
No. A bond typically covers up to 10% of the contract sum. Where the additional cost of completion is higher, the bond will only meet part of your loss.
Do I Need Express Insolvency Wording in the Bond?
Following Ziggurat, express insolvency wording is not strictly essential for a well-drafted bond, but it removes doubt and simplifies the claim. Where you can negotiate for it, do so.
How Long Do I Have to Claim Under a Performance Bond?
The bond states its own expiry, usually practical completion or the end of the defect’s rectification period. Diary the date, put the surety on notice within seven to fourteen days of any insolvency, and complete the final account well before the bond expires.
Can the Surety Challenge the Amount I Claim?
Yes. Even where liability under the bond is clear, the surety can challenge the quantum, which is why the accounting exercise has to be done carefully.
When Should I First Contact the Surety?
Ideally in writing within seven to fourteen days of contractor insolvency, before you formulate a demand. Early notice preserves the surety's ability to intervene and neutralises any later argument that silence has prejudiced the underwriters.
Last reviewed: July 2026.
