Performance bond in construction project: Secure liquidity and minimize risks in Germany
12 Oct 2025
5
Minutes
Katrin Straub
CEO at nextsure
A construction project has been completed, but five percent of the contract sum remains blocked as a security retention. This ties up capital that you need for new growth. A performance bond from an insurance company solves this problem while also securing your client's claims for defects.
The topic in brief and concise terms
A performance guarantee replaces the usual five percent security retention and ensures immediate liquidity for the contractor.
The costs of the guarantee range from 0.7 to 2.5 percent of the insured sum, which is significantly less than the benefits of the released capital.
The warranty periods differ depending on the contractual basis: five years according to the BGB and generally four years according to VOB/B.
The foundation of security: Understanding the function of the warranty bond
A warranty bond secures claims for defects after the acceptance of construction work. Instead of a security retention, typically five per cent of the contract sum, insurance acts as a guarantor. This assures the client that defects will be rectified even in the event of the construction company's insolvency. In return, the contractor receives 100 per cent of his final invoice immediately. This practice is established in the construction industry, plant engineering, and amongst trade businesses. The legal framework for this can be found in the German Civil Code (BGB) and the Procurement and Contract Procedures for Construction Services (VOB/B). This turns tied-up capital into an active liquidity advantage. The bond certificate is typically handed over to the client with the final invoice. This mechanism provides a reliable planning basis for both contractual parties.
Unlock liquidity: The direct financial advantage of surety insurance
The biggest advantage of the warranty bond lies in the immediate improvement of liquidity. Instead of waiting four or five years for the security retention, the money is readily available. The cost of the bond, known as an Avalzins, often ranges between 0.7 and 2.5 percent of the bond amount per year. An example calculation: For an order amount of 200,000 euros, the retention is 10,000 euros. The annual cost of a bond for this amount could be as low as 100 euros at one percent. This small amount releases the full 10,000 euros for investments or new projects. A solid construction financing is made significantly easier by this free cash flow. Additionally, the risk that the client themselves becomes insolvent and cannot pay the retention is eliminated. The bond is, therefore, a strategic instrument for financial optimisation.
The two sets of rules: Understanding the differences between BGB and VOB/B
The warranty periods and conditions depend on the underlying contractual framework. The Civil Code (BGB) and the Construction Contract Procedures (VOB/B) set different standards. The choice of the regulations has a direct impact on the duration of the guarantee. The VOB/B is not a statutory regulation, but must be explicitly agreed upon in the construction contract. For homeowners, comprehensive builder's liability insurance is essential in both scenarios. Here are the key differences:
Warranty period: Under BGB, you are liable for defects in buildings for five years, under VOB/B usually four years.
Acceptance: The VOB/B contains detailed regulations regarding formal acceptance that precisely define the start of the warranty period.
Defect notification: VOB/B often enforces shorter periods for defect notification by the client.
Limitation on rectification: Under VOB/B, a new limitation period of two years begins for rectified parts.
These differences determine the required duration and thus also the costs of your warranty guarantee.
Analyse of cost factors: Choosing the right surety insurance
The cost of a warranty bond varies depending on the provider and the creditworthiness of the company. Insurance is often a cheaper alternative to bank guarantees, which can cost up to five percent. An insurer typically charges between 0.75 and two percent of the bond amount as an annual premium. The creditworthiness of your company is the crucial lever for favourable conditions. A company with solid finances often pays less than one percent. A good safeguard for your home & living project begins with the selection of the right partner. Consider the following steps when selecting:
Compare offers: Obtain at least three quotes from specialist surety insurers.
Review framework contract: A surety framework for several projects is often cheaper than many individual bonds.
Read terms: Pay attention to the waiver of the “defence of prior notice”. This allows the guarantor to be directly claimed.
Prepare credit check: Have up-to-date business evaluations (BWA) ready to demonstrate your financial stability.
Careful selection reduces annual costs and ensures acceptance of the bond by the client.
Expert tips for practice: Safely avoid common pitfalls
In practice, details determine the effectiveness and cost of a guarantee bond. A common mistake is accepting unfavourable wording in the guarantee certificate. Our expert tip: Avoid under all circumstances bonds "on first demand". This clause obliges the guarantor to make an immediate payment at the request of the client, without the defect having to be proven. This poses a significant risk. Another important safeguard is construction performance insurance, which covers damages during the construction phase. Also, pay attention to the reputation of the guarantor; a guarantee from a financially weak provider may be rejected by the client. Additionally, ensure the timely return of the guarantee certificate after the warranty period expires to stop unnecessary premium payments. A simple calendar entry can save several hundred euros here.
The Emergency: Proper Handling of Defects
If a defect occurs within the warranty period, the client must first report it to the construction company. They must set a reasonable period for remedying the defect. If the contractor fails to fulfill this obligation, for example due to insolvency, the client may claim the guarantee. The insurer will assess the case and pay the agreed amount to the client. With this money, the client can commission another company to rectify the defect. The insurer will subsequently reclaim the paid amount from the original contractor. A structural fire insurance simultaneously protects against unforeseen events during the construction phase. The clear delineation of responsibilities ensures a structured process. Request your individual risk analysis now: Have your insurance situation reviewed for free and receive specific optimization suggestions.
More useful links
The Federal Statistical Office (Destatis) provides tables and data on construction here.
The Federal Gazette offers an official publication here.
The Bundesbank publishes statistics on interest rates for housing loans to private households in Germany on this page.
Laws in the Internet offers access to the Civil Code (BGB).
The Federal Ministry for Economic Affairs provides an overview and legal basis for the awarding of contracts.
The VDB (Association of German Guarantee Banks) offers information on the topic of guarantees on its website.
FAQ
What is a warranty bond for a construction project in Germany?
It is the guarantee of an insurance company or bank to cover defects in a building that occur after acceptance. It replaces the usual security retention of around five per cent of the contract sum, which the client would otherwise withhold until the end of the warranty period.
What advantages does the guarantee offer the contractor?
The main advantage is the immediate payment of the full order amount. This significantly improves liquidity and cash flow. Additionally, the risk that the client cannot repay the security deposit due to their own insolvency is eliminated.
What is the difference between a guarantee according to the German Civil Code (BGB) and the Construction Contract Procedures (VOB/B)?
The key difference lies in the duration of the warranty period. According to the German Civil Code (BGB), it is five years for buildings. If the German Construction Contract Procedures (VOB/B) are contractually agreed upon, the period is usually reduced to four years.
Can a client reject a warranty bond?
Yes, if the guarantee does not comply with the contractual agreements or the guarantor (the insurer) does not appear to be sufficiently creditworthy. Therefore, it is important to choose an established and financially strong insurer as a partner.
What does "first-demand guarantee" mean?
This clause means that the guarantor must pay upon the mere request of the client, without examining the legality of the claim in detail. This is very risky for the contractor and should be avoided if possible.
How do I terminate a warranty bond?
The guarantee ends automatically at the end of the warranty period. To stop the premium payments, the original guarantee document must be returned to the insurer. Actively request it back from your client.
