In short.
- In a private construction contract there is no statutory percentage: freedom of contract applies (article 1255 of the Spanish Civil Code), and it is the contract that sets which bonds the contractor provides, their amount, their term and how they are called. The 5% definitive guarantee under the LCSP is only mandatory in contracts with public authorities.
- The four usual bonds cover different stages of the contract: the advance payment bond answers for sums paid in advance; the performance bond, for execution of the works; the retention bond replaces the money the client withholds from each progress payment; and the maintenance bond, for defects during the defects liability period.
- What matters is the wording: whether the bond is payable on first demand or requires proof of default, when it reduces and when it expires. A surety bond can provide all of them; its terms are set by the policy and by the insurer's assessment of the contractor's financial standing.
A performance bond in a Spanish private construction project has no statutory amount: the contract decides it. And the same contract usually calls for three further bonds —advance payment, retention and maintenance— which, taken together, can tie up more of the contractor's guarantee facilities than the performance bond itself.
That is why the bond package should be negotiated alongside the contract, not afterwards: by the time the signed contract reaches the finance department, amount, calling mechanism and expiry dates are already fixed.
What is a performance bond, and why does the contract decide it in private works?
A performance bond is a guarantee that a third party —a bank or an insurer— issues in favour of the client for the contractor's due performance. The beneficiary may be the project owner, the developer or, in a subcontract, the main contractor. In Spanish practice it is referred to as a garantía or aval de fiel cumplimiento (a guarantee of due performance) or of buena ejecución (proper execution).
In private works, no rule states how much must be guaranteed. The legal basis is general:
- Freedom of contract: the parties may agree whatever terms, clauses and conditions they see fit, provided they are not contrary to the law, morality or public policy (article 1255 of the Spanish Civil Code).
- Works contract: it may cover labour only or also include materials (art. 1588 CC).
- Suretyship (fianza): a person binds themselves to pay or perform on behalf of a third party should the latter fail to do so (art. 1822 CC). The surety enjoys the benefit of excussion —the creditor must first pursue the debtor— unless, among other cases, the surety has expressly waived it or has bound themselves jointly and severally (arts. 1830 and 1831 CC).
- Surety insurance (seguro de caución): the insurer indemnifies the insured, by way of compensation or penalty, for the policyholder's breach of legal or contractual obligations (article 68 of Law 50/1980 on Insurance Contracts).
The 5% and the rules in articles 107 to 111 of Law 9/2017 on Public Sector Contracts (Ley de Contratos del Sector Público, LCSP) do not apply to a contract between companies. If your reference point is public works, the detail is in our guide to the LCSP definitive guarantee.
Public sector contracts awarded by entities that are not public authorities
There is a grey area that raises many questions. Public sector entities that are not public authorities —public companies, state-owned trading companies and the like— enter into private contracts (art. 26.1.b and c LCSP), whose effects and termination are governed by private law, with certain exceptions for contracting authorities, such as modification, assignment and subcontracting (art. 26.3 and 26.4 LCSP).
In those contracts the guarantee is discretionary: the contracting body decides whether to require it and sets its amount and regime within the ceilings the law refers to in articles 106.2 and 107.2 —3% for the provisional guarantee and 10% for the definitive one— and without deposit with the Caja General de Depósitos (the State General Deposit Fund) (art. 114 LCSP). The tender documents deserve the same careful reading as a private contract.
The four bonds in a private construction contract
Each bond answers for a different risk at a different stage of the contract, which sets its amount, form and duration.
| Bond | What it covers | Beneficiary | When it arises | When it should reduce or expire |
|---|---|---|---|---|
| Advance payment bond | Repayment of the unamortised advance | Whoever pays the advance | Before the advance is received | Reduces with each amortisation; expires once fully amortised |
| Performance bond | Execution in accordance with the contract | Project owner or main contractor | On signing or at commencement | As set by the contract (for example, on taking-over) |
| Retention bond | Replaces the sums retained from each progress payment | Project owner or main contractor | When the retentions are released | At the end of the agreed period |
| Maintenance bond | Defects during the defects liability period | Project owner or main contractor | On taking-over | At the end of the defects liability period |
This package should not be confused with the guarantee of payments on account for new homes: that protects a home buyer against the developer, not a project owner against its contractor.
Advance payment bond
The advance payment bond secures repayment of the advance for procurement, engineering or mobilisation until it has been amortised. It is reasonable for it to reduce as the advance is deducted from the progress payments, but that reduction is not presumed: without a reduction clause, the guaranteed amount remains the original one until the bond is cancelled.
Performance bond
This is the performance bond in the strict sense: it covers execution of the works in accordance with the contract. Its relationship with liquidated damages and penalties matters here. Under the Spanish Civil Code, an agreed penalty replaces damages unless otherwise agreed (art. 1152 CC). It is therefore advisable for the wording to state whether the bond answers for penalties, for proven loss or for both: that determines what the beneficiary can claim and on what evidence.
Retention money and replacing it with a bank guarantee or surety bond
It is common for the client to retain a percentage of each progress payment until the end of the defects liability period. A retention bond allows that money to be released in exchange for a third party answering for it.
The only statutory reference is in building works. Law 38/1999 on Building Regulation (Ley de Ordenación de la Edificación, LOE) allows the one-year guarantee for finishing defects to be replaced by the developer's retention of 5% of the cost of material execution (art. 19.1.a LOE). It is a benchmark, not an obligation: under the second additional provision of the LOE, only the ten-year guarantee is currently mandatory for residential buildings. We explain this in ten-year structural liability.
Maintenance bond
The maintenance bond covers defects that appear during the defects liability period following taking-over, and it starts with the certificate of acceptance. It should not be confused with the LOE guarantees for damage, such as ten-year structural insurance, which protect the purchaser of the building rather than the client under the works contract.
Does your contract require advance payment, performance and retention bonds at the same time? We review the bond package before you sign.
Which bonds does an EPC or turnkey contract carry?
An EPC (engineering, procurement and construction) or turnkey contract entrusts engineering, supply and construction to a single contractor at a fixed price and on a fixed timetable. Its counterpart in the Spanish Civil Code is the lump-sum works contract (ajuste alzado), under which the contractor cannot ask for a price increase except for changes to the plans authorised by the owner (art. 1593 CC).
The bonds are the same four, but with larger amounts and in sequence: advance payment during procurement, performance during execution and maintenance after taking-over, often overlapping. On top of that come the requirements of the project lender and, frequently, contracts drafted in English and governed by foreign law.
This is the typical situation for the generation plants and grid infrastructure we cover in insurance for energy companies. These contractual bonds should not be mixed up with the decommissioning guarantee for a renewable energy installation, which is administrative in nature.
Subcontractor and main contractor
The chain is replicated downstream: the main contractor usually asks its subcontractors for mirror bonds matching those it provides itself. There are limits. Law 3/2004 establishing measures to combat late payment in commercial transactions sets a payment period of 30 calendar days from receipt of the goods or services, which may be extended by agreement up to a maximum of 60 days (art. 4.1 and 4.3). It also declares void any clauses and practices on payment periods, late-payment interest or recovery costs that are grossly unfair to the creditor; in assessing this, the law expressly considers whether the main contractor imposes on its subcontractors payment terms not justified by those it receives itself (art. 9.1).
In addition, those who contribute their work and materials to a works project contracted on a lump-sum basis by the contractor have a direct claim against the owner up to the amount the owner still owes the contractor when the claim is made (art. 1597 CC).
How is the bond drafted: calling mechanism, reduction and expiry?
The first decision is the type of obligation. An accessory (conditional) bond requires the beneficiary to prove the default, and the guarantor may raise the contractor's defences. A first-demand guarantee is paid against a simple demand on the agreed terms, without first disputing the merits.
The LOE imposes the second formula for its surety insurance (art. 19.3.b-c); in private works, with no statute imposing it, the contract decides.
URDG 758 rules
The URDG 758 are the International Chamber of Commerce (ICC) Uniform Rules for Demand Guarantees, in force since 1 July 2010. They apply only where the guarantee or counter-guarantee expressly states that it is subject to them. They are common in international EPC contracts; before accepting a form of bond subject to them or to foreign law, please consult your legal adviser.
Checklist before signing
- Exact beneficiary, with its full registered name.
- Amount and currency, and whether the amount is fixed or reducible.
- Triggering event: proven default, simple demand or termination of the contract.
- Documents required to make a claim: statement, certificate from the site director, court judgment or arbitral award.
- Reduction clause (advance payment) and release clause (retention), with their specific mechanics.
- A fixed expiry date, not "until return of the original".
- Governing law and jurisdiction.
- Option to substitute the instrument during the contract, for example a bank guarantee for a surety bond.
Before you accept the client's form of bond, we review its wording. Let us discuss your next contract.
Private works vs public works: how they differ from the LCSP guarantee
| Aspect | Private works | Public works (public authorities) |
|---|---|---|
| Source | The contract | LCSP, arts. 107-111 |
| Amount | As agreed | 5% of the final tendered price, excluding VAT (art. 107.1), plus a supplementary guarantee of up to a further 5%, capped at 10% in total (art. 107.2) |
| Forms | As agreed | Cash or securities, bank guarantee, surety insurance or retention from the price (art. 108) |
| What it answers for | Whatever the wording says | Closed list in art. 110 |
| Return | As agreed | Regime in art. 111 |
| Deposit | No Caja General de Depósitos | Caja General de Depósitos or equivalent bodies |
Which instrument to choose for private bonds
All four bonds can be provided through a bank guarantee or a surety bond, if the contract accepts both. The differences in use of credit lines and in how each is called are set out in our comparison bank guarantee vs surety bond.
One point does not change with the instrument: ultimately, the contractor pays. In surety insurance, any payment made by the insurer must be reimbursed by the policyholder (art. 68 of the Insurance Contracts Law). Issuance depends on the insurer's assessment of financial standing, and its terms on the policy.
Nor should a performance bond be expected to cover what it does not. Damage to neighbouring properties during works and, more generally, third-party damage do not fall under this bond but under liability insurance.
The role of an independent broker
As an independent brokerage, we act on the client's mandate, not the insurer's. In private and EPC contracts we review the wording of the bonds before signature, size the surety facility for the whole package and take it to the entire market. Afterwards we track reductions and expiry dates and request cancellation when due, so that the facility is not tied up by exhausted bonds. If your business is construction, please also see our page on insurance for construction companies.
Contact us to review your bonds without obligation.
Frequently asked questions
Is a performance bond mandatory in a Spanish private construction project? Not by law. Only if the contract provides for it, under the freedom of contract in article 1255 of the Spanish Civil Code. The exception to watch is public sector entities that are not public authorities, where the contracting body may require it (art. 114 LCSP), within the ceilings of articles 106.2 and 107.2: 3% for the provisional guarantee and 10% for the definitive one.
What percentage is required for a private performance bond? There is no statutory percentage: the contract sets it. The 5% under the LCSP is a frequent reference point in negotiations, but it is not an obligation in private works.
Can the 5% retention be replaced by a bank guarantee or a surety bond? If the contract allows it or it is negotiated with the client. In building works, the LOE provides for retention of 5% of the cost of material execution as an alternative to the one-year guarantee for finishing defects (art. 19.1.a), although that guarantee is not currently mandatory.
When is the advance payment bond reduced or released? When and as its wording provides. A reasonable approach is a reduction proportional to the amortisation of the advance in each progress payment; without a written clause, the guaranteed amount does not reduce by itself.
What happens to the performance bond if the contract is terminated before the works are finished? It depends on its wording. If termination of the contract is listed as a triggering event, the beneficiary may claim on the agreed terms while the bond remains in force; if not, the outcome will depend on what the contract says about settlement and return. That is why the bond should state a fixed expiry date and the event that triggers it.
Sources and legislation
- Spanish Civil Code (Código Civil), articles 1152 (penalty clause), 1255 (freedom of contract), 1588, 1593 and 1597 (works contract), 1822, 1830 and 1831 (suretyship).
- Law 50/1980 on Insurance Contracts (Ley de Contrato de Seguro), article 68 (surety insurance).
- Law 38/1999 on Building Regulation (Ley de Ordenación de la Edificación), article 19 and second additional provision.
- Law 9/2017 on Public Sector Contracts (Ley de Contratos del Sector Público), articles 26, 106 to 111 and 114.
- Law 3/2004 establishing measures to combat late payment in commercial transactions, articles 4 and 9.
- International Chamber of Commerce, URDG 758: a guide to the Uniform Rules for Demand Guarantees.
Consolidated BOE texts consulted on 12 October 2026.
In private works, the amount, form, term and calling conditions of each bond are set by the contract; this guide describes the usual instruments and the general legal framework, not a market standard. Issuance of surety insurance is subject to the insurer's assessment of financial standing, and neither acceptance nor cost is guaranteed. This information is for guidance only and does not constitute legal or binding advice. New Brokers Correduría de Seguros, S.L., registered with the DGSFP under reference J0140.
