PERFORMANCE BOND

& PERFORMANCE
GUARANTEE SUM
 Introduction

If this obligation is not fulfilled

Contractor Responsible

It has a breach of contract

- To carry out the work

through to the contract

Contractor needs to pay

- To complete the works employer for the loss
within the time given
incurred by the employer
due to the breach
➢Employer may recover the loss through deduction from the amount
payable to the contractor in the interim or final certificates.

Employer may recover loss by:

- The deduction
- Demanding - Suing contractor
from the amount
payment from the in court
retained by the
guarantor
employer
PERFORMANCE BOND
 GENERAL
The contractor is essential to submit the performance
bond before he is allowed to start work on the site

performance bond is an agreement between the

Government, the contractor and a third party

the third party agrees to pay a sum of money to

the Government in the event of non-performance
of the contract by the contractor

The duration of the performance bond is from

the date for possession until 12 months after
practical completion or after making good
defects
 Amount of Guarantee

The value of the performance bond must be for an amount equal to

5% of the contract sum

Calculation of value of performance bond

Contract sum = RM 10,000,000.00
Value of performance bond = 5% of RM 10,000,000.00
= RM 500,000.00

The value of the performance bond does not change even though
the contract sum changes
 USE OF PERFORMANCE
BOND
The performance bond can be used at any time when ever
there is non-performance of the contract by the contractor

The government has the right to set-off an amount to cover

its loss and expense arising from the contractor’s non-
performance of the contract and to forfeiting the whole
amount of the bond

The Performance Bond may be used in the following

circumstances:
a) Payment of defect made good by others if S.O elected
to do so
b) Payment of works executed by others if failure by the
contractor to perform work when instructed
c) Payment for removal of improper work, materials and
plant
d) Reimbursement of insurance premium paid by the
employer if the contractor fails to insure as required
e) The recovery of liquidated damages
f) The recovery of loss in determination by employer
 USE OF PERFORMANCE
BOND (cont’d)
The amount of performance bond may be depleted over time
due to withdrawal by the employer to pay for the non-
performance by the contractor

The contractor is necessary to top up the amount under the

performance bond in case part of the amount under the
performance has been drawn by the government

This is to ensure that there is adequate fund in the bond to be

used by the government when necessary
 RELEASE OF PERFORMANCE BOND

Certificate of Practical C.C.M.G.D Release

Completion Performance Bond

12 months 14 days 3 months

 RELEASE OF PERFORMANCE BOND

If the contract is terminated by the government, the

performance bond is forfeited

The forfeiture takes effect regardless whether the termination

is lawful or not

This is to pay for the loss and damage incurred by the

employer due to the termination of the contract
 PERFORMANCE GUARANTEE SUM
Clause 13.1 Clause 13.1
a) The Contractor shall, on the date of b) If the Contractor fails to submit the
the possession of Site, provide a said Performance Bond as specified in
Performance Bond or Performance sub-clause (a) above on the date of
Guarantee Sum as the case may be possession of site, then the Contractor
substantially in the form as in Appendix shall be deemed to have opted for
issued by an approved licensed bank or Performance Bond in the form of
financial institution incorporated in Performance Guarantee Sum as
Malaysia in favour of the Government provided for under clause 13.2 hereof.
for a sum equivalent to five percent
(5%) of the total Contract Sum as
specified in Appendix to secure the due
performance of the obligations under
this Contract by the Contractor. The
Performance Bond shall remain valid
and effective until twelve (12) months
after the expiry of the Defect Liability
Period or the issuance of the Certificate
of Completion of Making Good Defects,
whichever is the later.
 Clause 13.2
“The Contractor may opt for a Performance Bond in the form of Performance
Guarantee Sum in lieu of the Bank, Insurance or Finance Company Guarantee as
specified in clause 13.1 hereof whereby deductions of ten percent (10%) shall be made
from the first interim payments and subsequent interim payment until the total
amount deducted aggregate to a sum equivalent to five percent (5%) of the Contract
Sum. The amount deducted shall be retained by the Government up to twelve (12)
months after the expiry of the Defect Liability Period or the issuance of the Certificate
of Completion of Making Good Defects, whichever is the later. “

4.1 Generally
‘The Contractor may opt for a Performance Bond in the form of
Performance Guarantee Sum…..’ (Clause 13.2)

• This is an alternative form of guarantee non-performance of construction

contract.
• The contractor may opt for Performance bond in the form or Performance
Guarantee Sum instead of cash, treasury deposit, banker’s draft, banker’s or
insurance guarantee.
Difficulties faced by the contractor in providing Performance
bond:

To provide collateral
• normally in the form of
To pay premium, cash deposit/assets
normally 2-3% of • equal to value of
amount insured. amount insured by the
bank i.e. 5% of
contract sum.
 ‘If the Contractor fails to submit the said
Performance Bond as specified in sub-clause (a)
above on the date of possession of site, then the
Contractor shall be deemed to have opted for
Performance Bond in the form of Performance
Guarantee Sum...’(Clause 13.1(b))

• Performance guarantee sum become mandatory if the Contractor fails

to submit Performance bond on the date of possession of site.
• It also become mandatory if the Contractor fails to state his choice
during tender i.e. in the Form of Tender.
 4.2 Deductions for Performance Guarantee Sums

‘...deductions of ten per cent (10%) shall be made from

the first interim payments and subsequent interim
payment until the total amount deducted aggregate
to a sum equivalent to five per cent (5%) of the
Contract Sum...’ (Clause 13.2)

The gross value of work done and material delivered as ascertained in the
interim payment certificate is subject to deduction for Performance
guarantee sum.
Percentage of retention is 10% of accumulated value of work done
including materials on site.
The deduction for Performance guarantee sum in the interim certificate
must stop when the accumulated amount so retained reaches 5% of
contract sum.
 4.3 Payment of Performance Guarantee Sum

‘...The amount deducted shall be retained by the

Government up to twelve (12) months after the
expiry of the Defect Liability Period or the
issuance of the Certificate of Completion of
Making Good Defects, whichever is the later.’
(Clause 13.2)

The money retained by the government is released 12 months

after Defects liability period or after all defects have been made
good by the contractor, whichever is later.
The amount retained by the government can be released earlier:
a) If requested by the contractor and
b) The contractor deposits a performance bond with the
government equivalent to 5% of the contract sum.
P.A.M 2018
 Clause 39.0 : Performance Bond

The above clause explains the procedure to be

adhered to regarding Performance Bond which
include:
a) Validity and release of Performance bond

b) Application of Performance Bond

c) Condition Precedent
 The contract has 2 methods of safe guarding the
interest of the employer in case non-performance
by the contractor:

Performance
Bond

Retention
Fund

There is no provision for Performance Guarantee Sum

In the P.A.M 2018 contract the contractual provision regarding
performance bond is shown in clause 39.0. Under this clause has explained
about a few sub clauses such as:

Submission of Performance bond Clause 39.1

Form of the Performance bond Clause 39.2

Validity of the Performance bond Clause 39.3

Failure to extend the validity Clause 39.4

Payments from the Performance bond Clause 39.5

Return of Performance bond Clause 39.6

 Submission of Performance
bond (Clause 39.1)

• The contractor is required to submit the Performance

Bond before the Date of Commencement of the
Works
• Extension of time by a limited duration (14 to 21
days) beyond the Date of Commencement of the
Works for the contractor to fulfill this obligation
• 5% of the Contract Sum
 Form of the Performance bond
(Clause 39.2)

• There are a few type of form of the

Performance bond can be issued to the
employer such as bank guarantee, insurance
guarantee and others.
 Validity of the Performance bond (Clause 39.3)
Certificate of Release
Practical Performance
Completion Bond

(3months)

❖ The duration of the validity for Performance

bond will be until 3 months after completion
date.

❖ The retention money can be utilized for making

good defects after 3 months period if the
Performance bond expired.
 Failure to extend the validity
(Clause 39.4)

❖The contractor need to make sure that the

Performance bond remains valid throughout its
validity period.

❖The employer has right to make deduction

from any payment due to the contractor for an
amount equal to 5% of the contract sum.
Payments from the Performance bond (Clause 39.5)

• The employer is given discretion whether to make call on

the Performance bond if the employer determines the
contractor's employment or if there any breach of contract
by the contractor.

• The employer can utilize and make payments out of or

deduction from the Performance bond for the completion of
and/or rectification of the works and reimbursement of loss
and/or expense suffered by the employer.

• On completion of the works, any balance of monies

remaining from the Performance bond shall be refunded to
the contractor without interest.
 Return of Performance bond
(Clause 39.6)
❖ The employer shall within twenty eight (28) days to return the Performance bond
to the contractor for cancellation.
❖ If the contractor determines his employment , the Performance bond is to be
returned to the contractor.
❖ The Performance bond also cannot be utilised by the Employer in this case since
the determination is not due to the contractor's fault.
❖ There are the exactly time to return back the Performance bond :

a) upon payment of the sum guaranteed

b) on due completion of the works
c) upon the lapse of any date of stipulated in the bond itself
d) where there is a material alteration of the risk in the obligation guaranteed
e) where there is a material variation in the terms of the principal contract even if the
alteration appears to be for the benefits of the principal
f) upon the cancellation of the bond
g) where the beneficiary expressly releases the surety's obligation or liability
DIFFERENCES BETWEEN P.W.D 203 A &
P.A.M 2018
P.W.D 203 A DIFFERENCES P.A.M 2018
(Rev.1/2010)
Provided Performance No provision
Guarantee Sum
Upon the giving of Release of 3 months after the
Certificate of the Performance Bond works has been
Completion of Making completed
Good Defects

No provision Retention Money Provided

THANK YOU…