Skip to main content
Marsh logo

Article

Surety bonds in the UK: Why the bond wording can make or break your company

Conditional vs. on-demand surety bonds: what contractors need to know.
Person's name and title

By Steven Lewis , 

Joint Practice Leader, Surety | UK & Ireland

24/07/2026 · 5 minute read

For UK construction companies, the wording of a surety bond can have major financial consequences, making it more important than ever to get it right. Understanding the differences between conditional and on-demand bonds could help your business avoid high costs and risks. But how well do you really understand the surety bond you’re being asked to provide?

The UK construction industry is facing a mixed outlook.

Project pipelines are being supported by the government’s UK infrastructure: A 10 year strategy, which sets out at least £725 billion of planned investment in social and economic infrastructure, including transport, energy networks, and major regional regeneration, with additional support for housing delivery.

The transition to net zero is also supporting demand, as commercial and public-sector building owners invest in retrofit and energy-efficiency improvements. Meanwhile, a more stable financing environment is beginning to support a cautious recovery in private housebuilding.

However, the sector continues to face significant headwinds.

Cash flow pressures, driven by payment delays and elevated energy, materials, and labour costs, remain a major threat to contractors.

Construction insolvencies are still higher than in any other sector. In May 2026, the industry accounted for 16% of all insolvencies in England and Wales, despite representing only a modest share of UK gross value added.

In this environment, project owners, developers, and funders are increasingly requiring surety bonds to protect themselves against contractor failure. Getting the wrong bond can expose a business to significantly greater costs and risks than many realise.

Is your company’s surety bond up to the job?

A surety bond is a three-party agreement under which a surety, typically an insurer or bank, guarantees the contractor’s obligations to the project owner. If the contractor defaults or becomes insolvent, the surety may be liable to meet a valid claim for the additional costs the owner incurs in completing the project with an alternative contractor, up to the bond amount.

The effectiveness of that protection, however, depends on one critical detail that is too often overlooked at the tender stage: the precise wording of the bond.

The fundamental distinction: Conditional versus on-demand bonds

Not all performance bonds are the same. In the eyes of the law, the difference between a conditional performance guarantee and an on-demand bond is fundamental — and the label on the document is not decisive.

Conditional performance bonds

These operate as a secondary guarantee. The surety will only be liable if the contractor breaches the contract and the employer suffers a loss as a result.

Typical wording: “The guarantor guarantees to the employer that in the event of a breach of the contract by the contractor, the guarantor shall discharge the damages sustained by the employer as established and ascertained pursuant to and in accordance with the building contract.”

On-demand bonds

These create a primary obligation on the surety. Payment is required upon receipt of a valid written demand, with no requirement to prove breach or loss. As long as the employer makes a demand that complies with the documentary requirements in the bond wording, the surety will have to pay the bond claim. There are essentially no defences available to an on-demand bond claim, with the possible exception of fraud, which is extremely difficult to establish.

Typical wording: “The guarantor undertakes to pay the employer on receipt of its first written demand stating that the contractor is in breach of its obligations under the contract, the sum of £XX.”

Why this matters for contractors

All surety bonds are issued on a recourse basis. If the surety pays out, it will seek to recover the full amount from you under an indemnity agreement.

Conditional bonds offer a much fairer balance of risk because any claim must be linked to proven default and actual loss. On-demand bonds significantly increase your exposure, allowing an employer to call the bond quickly and easily and triggering an immediate recourse claim against your company.

Recommendations: Five practical steps to protect your business:

  1. Review the actual wording, not just the title — Never assume a document labelled “performance bond” is conditional. Insist on seeing the full proposed bond wording at the tender stage.
  2. Push for conditional bonds where possible — These provide the most balanced risk allocation for contractors on the majority of UK domestic contracts.
  3. Check key clauses carefully — Pay particular attention to the definition of “default,” notice requirements, and any unfair or overly broad trigger language.
  4. Understand your indemnity agreement — Review the recourse terms with your surety provider before you bid, not after a bond is called.
  5. Involve your broker early — Work with an experienced construction surety specialist who can negotiate the bond wording, benchmark pricing, and ensure the bond fits both your risk appetite and the employer’s legitimate requirements.

Choosing the right bond is not a technicality — it is central to how risk is allocated on the project and can have major financial implications for your business.

Choose carefully — the stakes are high

With 9,466 UK construction businesses in “critical” financial distress in Q1 2026 (a 49% increase year-on-year), protecting your company’s balance sheet has never been more important.

By taking the time to understand and negotiate the right bond wording, contractors can bid more confidently, protect cash flow, and reduce the risk of unexpected recourse exposure. 

 

 

Your Marsh Risk contact

Placeholder Image

Steven Lewis

Joint Practice Leader, Surety | UK & Ireland

Related insights

Contract Risk TL 2026

Report

Contract Risk Management 2026

24/07/2026
Steel bars are stacked closely together at a construction site. They show signs of wear and rust. The setting is likely in an urban area during daylight hours.

Video

Subsidence risk and claims in UK social housing stock

21/07/2026
Female worker using tape measure at site

Article

How integrated project insurance (IPI) is changing UK construction project risk

14/07/2026
Placeholder Image

Article

Lower carbon concrete: Supporting the next phase of sustainable construction

30/06/2026
View more