One of the most available and
common types of surety bond
is the Performance
Bond where it guarantees
that the contractor completes
the project according to the
However, there is a bit of confusion regarding
guaranteeing contractor performance. Some
contractors are also required to post a Retention
Do not let the terms confuse you. Here, we discuss the
difference between a Performance Bond and
What is Retention?
Retention is a financial security (also called cash
retention or withheld cash) held by the lead contractor to
ensure that its subcontractors adequately fulfill the
obligations required of them under the contract. It is also
used as a safeguard against defects in case a
subcontractor fails to correct them.
Is cash retention a Performance Bond to keep a contractor
honest? Yes. Providing a Retention Bond slowly nudges
away the practice of cash retentions (or retention monies)
to guarantee the quality of contractor workmanship.
What is a Retention Bond?
A Retention Bond is a type of Performance Bond. Like all
surety bonds, it involves 3 parties:
And the bond provider
What is a Retention Bond?
In the bond agreement, the Surety will act as
guarantor between the two parties. The Surety
will pay the Obligee up to the full amount like
they would have in place of cash retention if the
contractor fails to perform the obligations or
remedy defects immediately after contract
completion (yes, even if the contractor has already
been fully compensated).
Why do you need a Retention Bond?
Contractors may be required to post a Retention Bond, along with
a Performance Bond, due to three simple, beneficial reasons:
The contractor can keep hold of their cash, thus improving its financial
standing and bringing substantial cost savings
The client benefits from the financial protection it requires
There will be no pursuit for the release of cash retention at the end of
Also, a Retention Bond usually includes an expiry date, so there will
be no confusion as to when contractors have been released from their
Are there types of Retention Bonds?
There are two types (usually categorized under Performance Bonds):
Conditional (or default): Where the Surety agrees
to pay if and when there is a breach of contract or
default made by the contractor.
Unconditional (payable on demand): Where the
Surety pays the Obligee only when the latter
makes a demand without having to prove a default
by the contractor.
How much does a Retention Bond cost?
Retention Bonds fall under the category of Performance
Bonds, which means that the cost will often be based on
the financial capacity of the applying contractor.
This type of bond is typically offered at the beginning of
a project in preference to cash retention. But, it is also
likely to be introduced during the development of a
project to release previously withheld retention monies.
I already posted a Performance Bond.
Why should I get a Retention Bond?
The use of a Retention Bond
depends on the Obligee who will
require contractors to post it.
A Retention Bond offers clients the
financial protection they need in
place of cash retention while
improving a contractor’s financial
standing as it enables them to
keep hold of their cash.
In a nutshell…
Serve as an
performance and defect
correction on public
projects instead of
applying cash retention