Performance bond (performance security)

The Handbook, published on the United Nations Global Marketplace (UNGM) and described by its authors as a descriptive handbook of good practice rather than a prescriptive document, says a performance security is a written instrument issued by a bank or an insurance company in favour of the UN organization. It is used in complex procurement where non-performance by the supplier could inflict serious damage, for example in works contracts and highly sensitive consulting contracts, and is typically set at 10% of the value of the contract. Security instruments can take the form of bank guarantees, surety bonds, stand-by letters of credit, cheques on which a bank is primarily liable, and cash deposits, and are not intended as a punishment.

When required, the Handbook says, performance bonds are a condition of the contract and typically must be properly issued and accepted for the contract to take effect, and they must be returned once the supplier has fulfilled its contractual obligations. It also warns that the more demanding a buyer is in requiring a bid security or a performance bond, the more likely contract prices will be higher. In the Handbook, delays are normally covered by liquidated damages paid by the supplier.