The Performance Guarantee Clause: What It Means and How to Negotiate It (2026)

What is a performance guarantee clause? A performance guarantee clause requires one party, usually the contractor or supplier, to provide security that it will perform the contract properly. The most common form is a performance bank guarantee, often called a PBG, where a bank promises to pay the buyer a set amount if the contractor fails to perform. It is widely used in construction, infrastructure, equipment supply and large services contracts. The guarantee gives the buyer something to fall back on if the work is not done, done badly, or abandoned, without having to sue the contractor first and wait for a judgment. The amount is usually a percentage of the contract value, commonly in the range of 5% to 10%, and the guarantee stays valid through the performance period, sometimes into the defects or warranty period. The fight in negotiation is almost always over three things: how much, how long, and how easily the buyer can call on it. A buyer wants a large, long, easily callable guarantee. A contractor wants a smaller, shorter one that the buyer can call only for real, proven default. This article is general guidance, not legal advice. ## On-demand versus conditional guarantees The single most important point is the type of guarantee: - On-demand (unconditional) guarantee. The bank pays on the buyer's written demand, often without the buyer having to prove the contractor actually defaulted. It is like cash for the buyer, and risky for the contractor, because the buyer can call it even in a disputed situation. Courts in many places will stop a call only for fraud or similar narrow grounds.

• Conditional (default) guarantee. The bank pays only if the buyer shows the contractor defaulted, sometimes needing a certificate, an adjudication or a judgment. It is safer for the contractor but slower and less certain for the buyer. Most large projects use on-demand performance guarantees. Contractors should negotiate the call conditions carefully, because an on-demand guarantee can be called while a dispute is still live. ## Sample performance guarantee clause ``` PERFORMANCE GUARANTEE 1. Within [N] days of signing, the Contractor will provide the Employer with a performance guarantee from a bank acceptable to the Employer for [10]% of the Contract Price, in the form set out in Schedule [__]. 2. The guarantee will remain valid from the date of issue until [N] days after [the end of the Defects Liability Period / completion], and the Contractor will extend it if the Works are delayed so that it never lapses while it is required. 3. [On-demand option] The guarantee is payable on the Employer's first written demand stating that the Contractor has failed to perform an obligation under the Contract, without the Employer needing to prove loss or default beyond that statement. [Conditional option] The Employer may call the guarantee only on producing [a certificate of default from the Engineer / an adjudicator's or court decision] establishing the Contractor's failure and the amount due. 4. The Employer may call the guarantee only for sums actually due to it because of the Contractor's failure, and will account to the Contractor for any amount called in excess of its proven loss. 5. The cost of providing and extending the guarantee is borne by the Contractor. The guarantee is in addition to, not in place of, the Employer's other rights under the Contract.

- **Match the term to the obligations.** Keep the guarantee valid for the whole period you need protection, including the defects period if relevant, and require extension if the work runs late.
- **Choose on-demand or conditional deliberately.** Decide which risk you are willing to carry, and draft the call conditions to match.
- **Add an accounting duty.** Even with an on-demand guarantee, a fair clause makes the buyer account for any amount called beyond its real loss.
- **Keep it additional.** Say the guarantee is extra security, not the ceiling of the contractor's liability. ## Both-side negotiation points **If you are the buyer or employer, push for:**
- A guarantee amount that reflects the cost of putting failure right.
- An on-demand guarantee from a strong bank, so you can draw quickly.
- Validity through the defects period and automatic extension if work is delayed.
- The guarantee as additional security, not a cap on liability. **If you are the contractor, protect:**
- A moderate percentage, since the guarantee ties up your banking lines and credit.
- A clear end date and automatic release once your obligations are met, so it does not sit open.
- If on-demand, a duty on the buyer to account for over-calls and, ideally, notice before a call.
- A guarantee tied to genuine default, and a carve-out so it cannot be called for matters that are the buyer's fault.
- A ban on the buyer holding both a large retention and a full performance guarantee for the same risk. ## How it differs from retention and a warranty A performance guarantee is third-party security from a bank, callable during the project. Retention is money the buyer holds back from payments, released over time. A warranty or defects liability clause is the contractor's own promise to fix problems. They overlap, which is why contractors resist carrying a full guarantee, a big retention and a long warranty all at once for the same risk. Line them up so the buyer is protected without the contractor's cash and credit being locked up two or three times over. ## A note on jurisdiction Performance guarantees are used worldwide, and the law on when a court will stop a call varies by jurisdiction. In India, courts generally treat an unconditional bank guarantee as independent of the underlying contract and will injunct a call only in narrow cases such as established fraud or irretrievable injustice, so an on-demand PBG is hard for a contractor to block. The approach in the United Kingdom and other common-law countries is broadly similar, protecting the autonomy of the bank's promise. Public-procurement rules in many countries set standard guarantee amounts and forms, so check whether a mandated form applies. Because these rules differ, this varies by jurisdiction, and the exact wording of the guarantee, not just the clause, decides how it works. ## One workspace for drafting and tracking guarantees The clause is only the start. The real work is tracking each guarantee's amount, validity and expiry so none lapses while it is still needed, chasing extensions when work runs late, and keeping these terms consistent across many contracts. Drafting a performance guarantee clause, reviewing how it sits with the retention and warranty terms, tracking expiry dates, and governing the lot can happen in one AI workspace tuned to how your company contracts. [Adira](https://adiralaw.com) is one tool that keeps a guarantee and its linked clauses and dates together. This guide by itself is enough to draft and negotiate a fair clause; a workspace just makes the drafting, review and date-tracking one job.