Tender documents and construction contracts often mention the "performance security" and the "insurance" side by side, in the same sentence – so it's no surprise that many contractors and principals feel the two cover the same ground, or that one replaces the other. The reality: these are two tools with entirely different purposes, and on a larger project both are often needed, independently of each other.
- The performance bank guarantee is a financial safeguard: the bank pays the client if the contractor fails to perform in accordance with the contract.
- Construction insurance (CAR/EAR) is loss cover: the insurer indemnifies physical damage arising in the project, in the works, or to a third party, in line with the terms and conditions.
- The two don't substitute for each other – a tender or contract can require both, independently of one another, with different sums and different deadlines.
What is a performance bank guarantee?
A performance guarantee is a banking or suretyship product: the bank, or the institution providing the surety, undertakes to pay a specified sum at the client's request if the contractor fails to fulfil its contractual undertaking – on time, to the specified quality, or at all. This serves the client's financial security for the case where there is a business-level problem with the contractor: it goes insolvent, drags the work out, or breaches the contract. Behind the guarantee stand the contractor's creditworthiness and its relationship with the institution providing the guarantee – typically a bank, but possibly an insurer authorised to provide sureties: with a bank guarantee this is a financial risk-taking product, whereas in the form of a surety/guarantee bond it is an insurance product.
What is construction insurance (CAR/EAR)?
CAR/EAR, by contrast, is about physical damage: a storm damages the half-built roof, a fire breaks out in the materials store, or – with a liability section – a subcontractor's machine damages the neighbour's fence. This risk is triggered not by the contractor's business reliability but by an actual, unexpected event on site. More on the basics: CAR vs EAR: what's the difference, and which one?; on exactly what is and isn't included: our article on that.
Why is both often required in a tender?
From a client's or principal's point of view, the two tools answer two separate risks, so it's logical for the tender documentation to require both: the performance guarantee prepares for the situation where the contractor cannot or will not finish the work, while construction insurance prepares for physical damage arising along the way – regardless of who otherwise performs properly and who doesn't. The exact wording of the tender documentation always governs: some ask for only one, some for both, with specified sums. On reading the documentation from an insurance angle: tender checklist; on the practice of certificates of insurance: certificate of insurance in tenders.
The typical misunderstanding
The most common mistake is thinking "if we have a bank guarantee, the insurance is just a formality" – or, the other way round, that strong insurance cover replaces the guarantee. The two tools don't add up to each other and don't substitute for one another: a claim for physical damage is settled by the insurer, a claim for non-performance by the bank, in entirely separate processes, under separate terms. If the contract or tender requires both, both have to be arranged separately – and the issuing deadlines can differ too, so leaving it to the last minute can cause a bottleneck on both sides.
What should you review before inception or a tender?
It's worth going through the tender documentation or draft contract line by line: which clause asks for a financial safeguard – a guarantee, a surety – and which asks for loss cover, i.e. insurance? What sum and duration attaches to each, and does either of them extend to the warranty/maintenance period? I can help on the insurance side of this – we've written about putting together the insurance content of clauses in our article on insurance clauses. The financial terms of the guarantees are worth agreeing with the bank or the institution providing the surety, and the two should be aligned before the project starts – not on the day the tender is submitted.
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