A performance bond is required when a construction contract specifies it, when a lender or funder makes it a condition of finance, or when a public sector or social housing procurement framework demands it. It is not a legal requirement under UK law. However, in practice, it is required on a wide range of medium and large construction projects.
If you are about to sign a building contract or finalise a funding agreement, you should confirm whether a performance bond is mandatory before committing to terms.
Is a performance bond a legal requirement in the UK?
No. There is no statute in UK law that automatically requires a performance bond on construction projects.
A performance bond becomes mandatory only when it is required by:
- The building contract
- A lender or funder
- A public sector or housing association framework
Although not legally imposed by statute, performance bonds are commercially entrenched in many sectors. On larger schemes, particularly those involving development finance or affordable housing, they are often treated as standard risk protection.
Performance bonds required by contract
The most common trigger for a performance bond is the building contract itself.
JCT standard forms
JCT standard forms frequently include provisions allowing the employer to require a performance bond. The requirement is typically confirmed in the contract particulars or schedule of amendments.
Under JCT arrangements:
- The contractor arranges the bond
- The employer is named as beneficiary
- The bond is commonly set at 10% of the contract value
The 10% figure represents the usual cap on the surety’s liability. It does not guarantee automatic payment of 10% but establishes the maximum exposure.
If the contract states that a bond is required, it becomes a contractual obligation. Failure to provide it can prevent contract execution or delay commencement.
NEC contracts and bespoke agreements
NEC contracts may also require performance security, depending on the option selected and the employer’s risk appetite.
On bespoke contracts, particularly in private development, bond requirements are usually set out in the tender documentation. Contractors price the bond cost into their tender.
If you are unsure whether your contract requires a bond, review the clauses referring to security, surety or performance guarantees.
When does a lender require a performance bond?
Development finance providers, institutional funders and bridging lenders increasingly require performance bonds as a condition of drawdown.
This is particularly common on projects valued over £1m.
The bond requirement will usually be set out in the facility agreement or as a condition precedent to the first drawdown. It may specify:
- The bond amount, typically 10% of contract value
- The required wording
- The minimum credit rating of the surety
The 2025 insolvency context
Contractor insolvencies increased during 2025. As a result, many lenders tightened their risk controls.
Projects that might previously have proceeded without a performance bond are now more likely to require one as part of funding conditions. From a lender’s perspective, the bond provides a defined financial backstop if the main contractor fails mid-build.
If a lender requires a bond and it is not in place, funds may not be released. This can halt a project before it begins.
Do lenders require performance bonds on residential developments?
In many cases, yes.
Residential developments supported by development finance are among the most common contexts in which performance bonds are required.
Lenders funding:
- Build-to-sell apartment schemes
- Build to Rent developments
- Mixed-use residential projects
often insist on a performance bond where a main contractor is appointed under a traditional building contract.
The bond works alongside other risk controls such as monitoring surveyors, step-in rights and structural warranties. Each addresses a different risk.
A structural warranty covers post-completion defects. A performance bond covers the risk of contractor failure during construction.
When do housing associations require performance bonds?
Housing associations and local authorities frequently require performance bonds as part of their procurement frameworks.
In social housing procurement:
- Bond requirements are often standard
- ABI model wording is commonly requested
- The bond amount is typically 10% of the contract value
Many housing associations specify acceptable bond wording within their contract documentation. The requirement is usually non-negotiable.
Government-funded projects under Homes England frameworks often include performance bond requirements within the contractual structure.
In this context, failure to provide the bond can prevent contract award or delay project mobilisation.
For related obligations under planning agreements, you may also encounter section 106 bonds, which serve a different purpose but sit within the same security framework.
The Procurement Act 2023 context
The Procurement Act 2023 has strengthened expectations around transparency and documentation in public sector procurement.
While the Act does not create a universal legal requirement for performance bonds, it reinforces the need for:
- Clear communication of contract requirements within tender documentation
- Transparent evaluation criteria
- Defensible risk allocation decisions
Where a contracting authority requires a performance bond, that requirement should be clearly stated and consistently applied.
From a developer or contractor perspective, this means bond requirements are less likely to emerge late in the process without formal documentation. Early review of procurement documents is therefore critical.
The Act does not replace legal advice, but it frames how public bodies document and justify security requirements.
When performance bonds are not required
Not all construction projects require a performance bond.
Examples where a bond may not be mandatory include:
- Small private commercial projects
- Informal domestic building contracts
- Some JCT Minor Works contracts
- Projects funded entirely with equity where the developer chooses not to require security
If neither the contract nor the lender specifies a bond, it may not be required.
However, even where not mandatory, some developers choose to require a performance bond as part of prudent risk management, particularly where contractor financial strength is uncertain.
The decision should be deliberate rather than assumed.
What percentage of contract value is a performance bond set at?
In the UK market, performance bonds are typically set at 10% of the contract value.
This percentage is widely used under JCT and in residential and commercial development finance contexts.
The 10% figure represents the maximum liability of the surety under the bond. It does not mean that the employer automatically receives 10% if the bond is called. Payment depends on the bond wording and evidence of default.
In some cases, particularly on lower-risk projects or where contractor strength is strong, a lower percentage may be negotiated. Conversely, certain funders or public bodies may insist on the full 10%.
What happens if I cannot provide a performance bond?
If you are a contractor and cannot provide a required bond, several consequences may follow:
- The contract may not be awarded
- The employer may refuse to sign the building contract
- The lender may withhold funding
- An alternative form of security may be requested
In some circumstances, employers may accept alternatives such as parent company guarantees. However, this depends on the specific contract and risk profile.
If you are a developer and your contractor cannot secure a bond, you must assess whether proceeding without one aligns with your funding and risk obligations.
Bond availability depends heavily on contractor financial strength. Early engagement with A-rated sureties reduces the risk of late-stage complications.
LBB arranges performance bonds from A-rated sureties only. Financial strength of the provider is critical. A bond that cannot respond to a valid claim offers limited protection.
What should you check before signing?
Before signing a building contract or finalising a funding agreement, you should review:
1. The contract conditions
Look for clauses referencing performance security, bonds or sureties.
2. The facility agreement
Confirm whether a performance bond is a condition precedent to drawdown.
3. Procurement documentation
On public or housing association projects, review tender documents for mandatory bond wording.
If a bond is required, confirm:
- The required amount
- The wording specification
- The acceptable credit rating of the surety
- The timeframe for delivery
Leaving this review until after contract exchange can create avoidable delay.
Do I need a performance bond?
The answer depends on your project.
You will likely need a performance bond if:
- Your contract specifies one
- Your lender requires one
- You are delivering a housing association or public sector scheme
- The project value exceeds £1m and external finance is involved
You may not need one if:
- The project is small and privately funded
- The contract does not require performance security
- The lender has not imposed it as a condition
Where uncertainty exists, independent advice ensures that you understand whether the requirement is mandatory, negotiable or discretionary.
For broader context on how performance bonds fit within the wider security framework, see our guide to construction bonds.
For detailed information on structure, wording and cost, visit our performance bonds service page.
Frequently asked questions
Is a performance bond a legal requirement?
No. It is not mandated by UK law. It becomes required only when specified by contract, lender or procurement framework.
What happens if a required bond is not in place?
If the bond is contractually required and not provided, the contract may not proceed. If required by a lender, funding may be withheld. On public sector projects, failure to provide the bond can invalidate the appointment.
Getting clarity before commitment
Performance bonds are not universally mandatory, but they are commercially entrenched across many sectors.
They are most commonly required:
- Under JCT and similar standard forms
- By lenders on projects over £1m
- By housing associations and local authorities
- Within publicly funded frameworks
The 2025 increase in contractor insolvencies has reinforced their importance.
If you are reviewing a live contract or funding agreement and are unsure whether a bond is required, LBB can assess the documentation, confirm the obligation and arrange a performance bond with an A-rated surety where necessary.
The priority is clarity before commitment. A performance bond should never be an afterthought once contracts are signed.
