Performance Guarantee Guide for Government Contracts

What Is a Performance Guarantee?

A performance guarantee (also called a performance bond or bank guarantee) is an irrevocable undertaking by a bank or approved financial institution to pay the employer (government) up to a specified amount if the contractor defaults on their contractual obligations.

In South African government contracts, performance guarantees are typically required for contracts above a certain threshold (often R200,000 or higher for construction). The standard quantum is 10% of the contract value, though some contracts may require 5% or up to 15% for higher-risk projects.

Types of Performance Guarantees

South African government contracts use two main types of performance guarantees:

• Unconditional (on-demand) guarantee: The bank pays immediately upon written demand from the employer, without requiring proof of default. This is the most common type for government contracts and poses the highest risk to contractors.
• Conditional (default) guarantee: The bank pays only upon proof of default (e.g., court order or arbitration award). Less common in government contracts but more favourable to contractors.
• JBCC (Joint Building Contracts Committee) performance guarantee: The standard form used in most South African building contracts, including government. Uses a specific wording that is widely accepted by banks.

How to Obtain a Performance Guarantee

Performance guarantees are issued by major South African commercial banks (ABSA, Standard Bank, FNB, Nedbank, Investec) and some specialised surety companies. The bank issues the guarantee on the instruction of the contractor (their client) to the employer (government).

To obtain a performance guarantee, you will need: a banking facility (credit line) with the issuing bank, the signed contract or contract award letter, the specific guarantee wording required by the contract, and sufficient credit headroom in your banking facility.

Banks typically charge 1%–2.5% per annum on the guarantee value. This is an annual cost that you must factor into your contract pricing. For a R1 million guarantee, expect to pay R10,000–R25,000 per year in guarantee fees.

Standard Performance Guarantee Wording

Most government contracts specify the exact wording for the performance guarantee. Common elements include: the contractor's full name and registration number, the employer's name, the contract reference number and description, the maximum guarantee amount, the expiry date or conditions for reduction/release, and the bank's irrevocable undertaking to pay on demand.

Use the wording specified in the contract. If the contract does not specify wording, use the JBCC performance guarantee form, which is the South African industry standard.

Reduction and Return of the Performance Guarantee

Under JBCC contracts, the performance guarantee is typically reduced to 50% of its original value at Practical Completion (when the works are substantially complete and the employer takes occupation). The remaining 50% is held during the Defects Liability Period, which is typically 12 months after Practical Completion.

At the expiry of the Defects Liability Period (and provided all defects have been rectified), the employer must return the performance guarantee to the contractor. Ensure you follow up on guarantee return — delays in return mean continued bank charges on a facility you no longer need.

Frequently Asked Questions

Related Guides

• Retention Money Guide
• Bid Bond Guide
• Cash Flow Management