A construction retention bond, a performance bond and a parent company guarantee all get described as security. They protect against different events, they are called on in different circumstances, and holding one does not substitute for another.
Understanding which risk each addresses is the difference between a client who is covered and one who discovers at the worst moment that they are not.
Cash retention
A percentage withheld from each payment, released in two halves at practical completion and at the end of the defects period. It is the client's money, held by the client, and it is available immediately.
Its advantage is simplicity and certainty. There is no third party, no wording to argue about, and no process to invoke. Its disadvantage falls on the contractor, whose cash flow carries it.
As leverage it is unmatched. A contractor with money outstanding returns to make good defects. The mechanism and its failure points are covered in defects, retention and the last five per cent.
Retention bond
A bond from a bank or surety in place of cash retention. The contractor keeps the cash and the client holds an instrument they can call on instead.
It costs the contractor a premium, which is usually reflected in the price, and it costs the client immediacy. Calling a bond is a process, and the wording determines how straightforward it is: an on demand bond pays against a demand, a conditional bond requires proof of loss.
The practical question is what the wording actually says. Many retention bonds are conditional, expire on a fixed date, and require the client to establish entitlement. That is a materially weaker position than holding the cash.
Performance bond
Security against the contractor failing to perform, most commonly insolvency. Typically ten per cent of the contract sum, and typically conditional rather than on demand.
It protects against a different event from retention. Retention covers defects; a performance bond covers the cost of completing the works with somebody else after the original contractor has gone.
The value ten per cent is conventional rather than calculated, and on a scheme where replacing a contractor mid contract would cost far more, it is worth understanding that the bond is a contribution rather than a full remedy.
Expiry matters. A bond expiring at practical completion offers nothing during the defects period, which is when many insolvencies bite.
Parent company guarantee
A promise by the contractor's parent to perform the contract if the subsidiary does not. It costs nothing and it is worth exactly as much as the parent.
That is the whole analysis. A guarantee from a substantial parent with real assets is valuable security. A guarantee from a holding company with no trading activity is a document.
Checking the guarantor's accounts before accepting the guarantee is a five minute exercise that is skipped remarkably often. Where the parent is overseas, enforceability is a further question and one for solicitors.
What a lender wants to see
On a funded scheme the lender has the same interest and usually specifies the security package as a condition. That commonly includes a performance bond, collateral warranties from the contractor and key consultants, and evidence of professional indemnity cover.
The lender's concern is what happens if the contractor fails mid facility, because at that point the security value depends entirely on being able to complete the building. Warranties with step in rights matter more to a lender than to a developer.
That perspective is set out under what we do for the lender side.
Cost and where it lands
Bonds and guarantees are not free. Bond premiums are priced into the tender, and a contractor required to provide a full security package will reflect it.
That is often the right trade, and it should be a deliberate one. On a modest scheme with a well established contractor, an extensive security package may cost more than the risk it covers. Equally, on a large scheme with a thin covenant, it is cheap.
Asking bidders to price the security package as a separate item makes the trade visible, which is worth doing at tender stage rather than assuming.
What this means for you
Establish which risk each instrument covers and check the expiry dates. A performance bond that expires at practical completion and a retention bond that expires before the defects period ends leave a gap that is easy to miss.
Then read the wording rather than the label. On demand and conditional bonds behave completely differently when you need them, and the difference only becomes apparent at the point it matters. The wider pattern is described in hidden cost exposure.
Not sure what your security actually covers?
Send the contract and the bond wording. We will set out what is protected, by whom, and for how long.