Tender Bonds and Performance Bonds in Irish Public Procurement

A tender bond (also called a bid bond) is a financial instrument provided by a tenderer guaranteeing that if the tenderer is selected as the preferred bidder, it will enter into the contract on the terms of its tender. If the tenderer withdraws its tender or declines to execute the contract after being selected, the authority can call the bond to recover the cost of re-tendering or the difference between the selected tender and the next-lowest compliant tender.

Tender bonds are typically required for significant works contracts where the cost of a failed award (re-tender cost, programme delay, escalation in re-tender prices) would be material. CWMF guidance suggests tender bonds are appropriate for contracts above a defined value threshold. The bond value is typically set between 1% and 3% of the estimated contract value, calibrated to the estimated cost of failed award. Requiring a tender bond above this level is not proportionate and could deter smaller but capable contractors from tendering.

A performance bond is a financial instrument issued by a bank or surety company guaranteeing performance of the contractor's obligations under the contract. If the contractor defaults — for example by becoming insolvent, abandoning the site or materially breaching the contract — the authority can call the bond to fund the completion of the works by another contractor or to recover losses caused by the default.

Under the CWMF public works contracts, performance bonds are typically set at 12.5% of the contract sum. This is a market-standard level in Ireland and aligns with international practice for public works contracts. The bond must be from a bank or surety company with an acceptable credit rating, and the bond document must be in the standard CWMF form or a form approved by the authority's legal advisor. Non-standard bond forms should be reviewed carefully — some contractor-favoured forms include conditions that make calling the bond significantly more difficult.

Calling a performance bond is a serious and irrevocable step. The authority must have clear grounds — typically contractor insolvency, repudiation of the contract, or material breach that has not been remedied after notice. Before calling the bond, the authority should take legal advice, review the bond conditions carefully (including any notification requirements or conditions precedent to making a valid demand), and consider whether the calling of the bond might precipitate contractor insolvency if the contractor is in financial difficulty but has not yet formally failed.

A poorly documented performance bond call can be contested by the bond provider, resulting in litigation and delay in receiving the funds needed to complete the works. The procurement file and contract administration records must contain clear evidence of the contractor's default, the notices issued and the opportunity given to remedy. GovIQ's audit chain maintains an immutable record of all contract events — notices issued, responses received, escalations logged — that can support a valid and defensible bond call.

Bond requirements must be proportionate to the risk they address. Authorities should not require performance bonds for low-value or low-risk contracts where the cost of obtaining the bond (typically 0.5%–1.5% of the bond value annually, which is effectively an added cost to the contract) is not justified by the protection afforded. For contracts below a defined value threshold where the authority has adequate financial reserves, bond requirements may be dispensed with.

For SME tenderers, obtaining a performance bond from a bank or surety company may be more difficult or more expensive than for larger contractors. Where the market analysis indicates that SMEs are likely to be the primary bidders for a contract, the authority should consider whether a reduced bond value, a parent company guarantee, or a retention-based approach (withholding a percentage of each payment until practical completion as security) would achieve the same protection at lower cost and without unnecessarily restricting the competitive field.