Performance security

Performance security is financial security a winning bidder must provide after contract award to guarantee it will perform the contract — typically a performance bond, a labour and material payment bond, or a security deposit. It is distinct from bid security, which protects the buyer before award, while performance security protects the buyer during the contract.

What it is

In Canadian federal contracting, the financial-security clauses of Public Services and Procurement Canada's Standard Acquisition Clauses and Conditions (SACC) Manual set out the forms of contract financial security a contractor must provide within a stated number of calendar days after the date of contract award. The options are: a performance bond on form PWGSC-TPSGC 505, in a stated percentage of the contract price; a performance bond plus a labour and material payment bond on form PWGSC-TPSGC 506, each in a stated percentage; a labour and material payment bond alone; or a security deposit — government guaranteed bonds, bills of exchange, or irrevocable standby letters of credit — in a stated percentage of the contract price. Any bond must be accepted as security by a bonding company licensed to provide surety in Canada.

How it relates to bid security

Bid security is what you submit with your bid to deter non-serious bids — commonly a bid bond on form PWGSC-TPSGC 504 or a security deposit. The standard 504 bid bond's conditions tie the two together: if the tender is accepted, the bidder must execute the required contractual documents and furnish a performance bond and a labour and material payment bond, each in the amount of 50% of the contract price, or other security acceptable to the Crown. In other words, bid security usually commits you to performance security. If Canada does not receive the required performance bond within the specified period after award, the SACC clauses allow Canada to terminate the contract for default.

What it means for vendors

Check the security requirements in the bid solicitation before you bid, not after you win: you need a surety relationship in place and time to have the bond executed and delivered within the contractual window. Typical construction solicitations also specify bonding company acceptance requirements and may allow electronic bonds that Canada can verify. Missing the delivery deadline is a default risk, so suppliers without bonding capacity should either line up a surety in advance or factor the security-deposit options into pricing.

Common questions

Is a performance bond the only form of performance security?

No. Federal SACC clauses accept performance bonds, labour and material payment bonds, security deposits (government guaranteed bonds, bills of exchange, irrevocable standby letters of credit), or combinations of these — the solicitation states which options apply.

Who pays for the performance bond?

The supplier does — the bond is purchased from a surety company as a cost of doing the work. It is a real cost to price into your bid wherever the solicitation requires contract financial security.

Related definitions

Bid security · Bid bond vs. performance bond · Bid deposit · Consent of surety