When Does Performance Security Become Payable in Government Procurement?

Introduction to Performance Security

Performance security is a common requirement in government procurement. Vendors must fully understand when this security becomes payable to mitigate risks and fulfill contractual obligations. This article provides evidence-based guidance for SMB vendors and contractors engaging in public procurement processes.

What is Performance Security in Government Procurement?

Performance security is a financial instrument that government agencies use to safeguard projects. It ensures contractors will complete their contractual obligations as agreed—on time, within budget, and according to specifications. This security protects the public agency from losses if the selected vendor defaults or fails to perform.

Common forms of performance security include:

• Bank guarantees
• Surety bonds
• Irrevocable letters of credit
• Certified cheques or cash deposits (less common)

Government solicitation documents often specify the amount and type of performance security required. It typically equals 5-20% of the contract value, based on the project’s size and risk.

When Does Performance Security Become Payable?

Performance security does not become payable (handed over or activated) at the bidding stage. Instead, there are specific milestones and triggers that determine when a vendor must provide or ‘pay’ the performance security. Key points include:

1. Upon Contract Award and Before Project Start

Most government contracts require the successful bidder to submit performance security shortly after award but before any work begins. Typically, procurement officers specify an exact deadline in the contract notification—often within 7 to 21 calendar days of award notification.

Example: A city government awards a roadwork contract. The contractor must present a performance bond equal to 10% of the contract value within 10 business days of receiving the award letter, before any site access is granted.

2. As a Condition Precedent for Contract Activation

Contract terms generally state that performance security is a condition precedent. This means the agency will not issue a formal notice to proceed or activate the contract until the security is delivered to, and accepted by, the agency’s finance or procurement office.

Failure to provide the required security may result in cancellation of the contract award and potential forfeiture of any bid security previously lodged.

3. During Contract Execution (in Special Cases)

Less commonly, agencies may require top-ups or replacements if the contract is varied (such as an increased scope or value) or if an existing guarantee expires before final contract completion.

However, partial payment of security or rolling guarantees are typically reserved for long-term, high-value infrastructure contracts.

Practical Steps for Vendors

SMB vendors entering public contracts should follow these steps to manage performance security obligations:

1. Carefully review solicitation documents: Note the performance security amount, acceptable forms, and timing of submission.
2. Engage your financial institution early: Request indicative terms and required documentation for bonds or letters of credit before bidding.
3. Monitor award notifications: Upon award, immediately clarify submission deadlines and agency processing requirements.
4. Prepare required documents and funds: Make arrangements so your performance security can be issued without delay once notified.
5. Retain proof of submission: Ensure you obtain written confirmation or a receipt upon delivering the security to the agency.
6. Track expiration/renewal dates: If your security instrument is set to expire during the contract period, coordinate renewals with the issuer and agency well in advance.

Additional vendor readiness guidance is available in our Vendor Readiness Checklist.

Key Considerations in Managing Performance Security

• Cost implications: Bonds and guarantees may incur annual fees. Understand these costs and budget them as part of your bid.
• Legal obligations: The terms within security documents and agency contracts are binding. Ensure you understand all triggers for forfeiture or claims.
• Duration: Some contracts require security to remain valid for the entire warranty period, not just construction or delivery phases.
• Return of security: After contract completion and any required defects liability period, vendors may request release or return of security, subject to agency approval.

Common Mistakes and How to Avoid Them

• Missing deadlines: Delayed submission of performance security is a frequent disqualification reason. Clarify all timelines up front and maintain reminders.
• Submitting non-compliant forms: Agencies have strict rules on acceptable guarantors or types of instruments. Always follow exact specifications.
• Ignoring contract amendments: Failing to increase security after a contract variation can put your business at risk.
• Overlooking release requirements: Some vendors forget to officially request the return of security after project completion or neglect to provide necessary documentation.
• Financial over-commitment: Underestimating the impact of bank guarantees on overall borrowing capacity. Keep your financial provider informed of all outstanding commitments.

Summary and Next Steps

In government procurement, performance security becomes payable after a contract is awarded and before execution begins. Compliance with agency requirements is essential to maintain eligibility and minimize project risk. Vendors should plan in advance, engage trusted financial providers, and track contractual deadlines carefully.

For full guidance on preparing for government opportunities, we recommend using the Vendor Readiness Checklist. To ensure timely notifications and access to current procurement requirements, register as a PCANA vendor today. Registration increases your readiness and supports compliance throughout all stages of government procurement.