A Philippine Legal and Contracting Guide

I. Introduction

In Philippine construction, procurement, services, supply, and project contracting, a performance bond is commonly required to protect the project owner, principal, main contractor, government agency, developer, or client against the risk that a contractor or subcontractor will fail to perform its obligations.

A recurring practical question is whether a subcontractor may charge the cost of a performance bond to the principal.

The answer is: it depends primarily on the contract. A subcontractor may charge the bond cost to the principal if the contract, bid documents, purchase order, change order, negotiation records, industry arrangement, or subsequent agreement allows reimbursement or pass-through. But if the subcontractor agreed to provide a performance bond as part of its own obligation and submitted a fixed contract price, the bond premium is usually treated as part of the subcontractor’s cost of doing business unless the contract clearly states otherwise.

This issue becomes more complicated when the party requiring the bond is not the same party paying the subcontractor, when the principal is a government agency, when the subcontractor was required to obtain a bond after contract signing, when the bond amount was increased, when the scope changed, when the bond is required because of the principal’s special requirement, or when the subcontractor is merely passing through a cost imposed by the principal or project owner.

This article explains, in the Philippine context, the legal and practical rules on performance bond costs, whether they may be charged to the principal, how contracts should be interpreted, what happens in government and private projects, how subcontractors should protect themselves, and how disputes over bond premiums may be resolved.

This is general legal information and not a substitute for advice from a Philippine lawyer, procurement specialist, accountant, surety company, or contracts professional.

II. What Is a Performance Bond?

A performance bond is a security instrument issued to guarantee the faithful performance of contractual obligations. It is usually issued by a surety company, insurance company, bank, or other acceptable bonding institution.

If the contractor or subcontractor fails to perform, the obligee may call on the bond, subject to the terms of the bond and applicable law.

In a typical arrangement, there are three key parties:

Principal / Contractor / Subcontractor as bond principal The party whose performance is guaranteed.
Obligee The party protected by the bond. This may be the project owner, government agency, main contractor, developer, or client.
Surety / Issuer The bonding company, insurance company, bank, or surety that issues the bond.

In project contracts, a performance bond may be required to secure:

completion of works;
delivery of goods;
proper installation;
compliance with specifications;
warranty obligations;
correction of defects;
faithful performance of service obligations;
return of advance payment;
protection against abandonment;
performance during a maintenance period;
compliance with government procurement rules.

III. Performance Bond vs. Other Bonds

A performance bond should be distinguished from other security instruments.

A. Bid Bond

A bid bond secures the bidder’s obligation to honor its bid and enter into the contract if awarded.

B. Performance Bond

A performance bond secures performance after contract award.

C. Surety Bond

A surety bond is a general term. A performance bond is one type of surety bond.

D. Advance Payment Bond

This secures repayment or proper use of an advance payment or mobilization fund.

E. Warranty Bond

This secures correction of defects during the warranty or defects liability period.

F. Retention Bond

This may substitute for retention money that would otherwise be withheld.

G. Labor and Materials Payment Bond

This secures payment to workers, suppliers, or subcontractors in some contracting arrangements.

Each bond may have a different purpose, premium, beneficiary, duration, and cost allocation.

IV. The Central Rule: Contract Controls Cost Allocation

The most important legal principle is that the contract between the parties controls who bears the cost of the performance bond, subject to law, public policy, and applicable procurement rules.

A subcontractor can charge the cost of a performance bond to the principal if there is a legal or contractual basis, such as:

express reimbursement clause;
contract provision treating bond premium as reimbursable;
bill of quantities item for bonds and insurance;
approved variation order;
owner-directed requirement after award;
principal’s written instruction to secure additional bond;
cost-plus contract arrangement;
reimbursable expense clause;
pass-through clause;
bid clarification;
purchase order line item;
change in bond amount or duration not contemplated in the original price;
accepted quotation showing bond cost separately;
course of dealing between parties;
written approval of bond premium reimbursement.

If none of these exists, and the subcontractor agreed to provide a performance bond as part of its contract obligations, the bond cost is usually deemed included in the subcontract price.

V. Meaning of “Principal” in This Context

The word principal can mean different things depending on the contract structure.

A. Principal as Project Owner or Client

The principal may be the project owner, developer, government agency, or company procuring the work.

B. Principal as Main Contractor

In subcontracting, the “principal” may refer to the main contractor who engages the subcontractor.

C. Principal in Suretyship

In bond terminology, the “principal” is the bonded party whose performance is guaranteed. This can be the subcontractor.

Because the word can be ambiguous, contracts should clearly identify:

who is the project owner;
who is the main contractor;
who is the subcontractor;
who is the obligee under the bond;
who pays the bond premium;
whether the bond premium is included in the contract price or separately reimbursable.

VI. Common Contracting Structures

A. Owner Requires Main Contractor to Submit a Performance Bond

In many projects, the project owner requires the main contractor to post a performance bond. The main contractor usually includes the cost of that bond in its bid or overhead.

If the main contractor then subcontracts part of the work, the main contractor may require the subcontractor to post a separate subcontractor performance bond in favor of the main contractor.

Whether the subcontractor may charge the bond cost depends on the subcontract.

B. Main Contractor Requires Subcontractor to Post Bond

If the subcontract expressly requires the subcontractor to furnish a performance bond at the subcontractor’s expense, the subcontractor cannot later bill the principal separately unless the principal agrees.

If the subcontract merely says a bond is required but is silent on cost, interpretation may depend on price structure, bid documents, negotiations, and industry practice.

C. Project Owner Requires Bond Directly From Subcontractor

Sometimes the owner or developer requires nominated subcontractors or specialist subcontractors to submit a bond directly in favor of the owner. If this requirement comes from the owner and was not included in the subcontractor’s original price, the subcontractor may have a stronger basis to seek reimbursement, especially if the requirement arose after the quotation or contract.

D. Cost-Plus or Reimbursable Contract

In a cost-plus contract, bond premiums may be reimbursable if they fall within approved reimbursable costs. The subcontractor should still confirm whether premiums, taxes, documentary stamps, notarial fees, and renewal charges are covered.

E. Lump-Sum Contract

In a lump-sum contract, the subcontractor usually bears the costs necessary to perform, including bonds, permits, insurance, overhead, mobilization, and administrative expenses, unless excluded or separately reimbursable.

VII. Is the Bond Cost Part of the Subcontractor’s Overhead?

Often, yes.

In a fixed-price or lump-sum arrangement, a performance bond premium is commonly treated as part of the subcontractor’s project cost or overhead. A prudent subcontractor should include it in pricing if the bid documents require a bond.

Costs commonly included in a contractor’s price include:

bond premiums;
insurance premiums;
permits;
licenses;
mobilization;
demobilization;
site administration;
safety compliance;
supervision;
taxes;
documentary stamp tax;
notarization;
bank charges;
guarantee fees;
administrative expenses.

If the subcontractor failed to include the bond cost in its quotation despite being aware of the requirement, it may be difficult to charge it later.

VIII. When the Subcontractor May Charge the Bond Cost

A subcontractor may have a strong basis to charge the cost of a performance bond to the principal in the following situations.

A. Express Reimbursement Clause

The clearest basis is a contract clause stating that bond cost is reimbursable.

Example:

“The cost of performance bond premiums, documentary stamp taxes, and related charges shall be for the account of the Principal and reimbursed upon submission of official receipts.”

If the contract says this, the subcontractor may bill the cost subject to documentation.

B. Separate Line Item in Quotation

If the subcontractor’s approved quotation separately lists:

contract price;
performance bond premium;
taxes;
insurance;
permits;

and the principal accepted the quotation, the subcontractor can argue that the bond premium was not absorbed in the base price but was separately chargeable.

C. Bill of Quantities Includes Bonds

If the bill of quantities or schedule of prices has a pay item for “bonds and insurance,” then the subcontractor may charge according to that item.

D. Principal Required the Bond After Contract Signing

If the original agreement did not require a performance bond and the principal later demanded one, the subcontractor may seek reimbursement or price adjustment because the requirement is an additional cost.

This is especially strong if:

the requirement was not in the bid documents;
the subcontractor priced the work without it;
the principal issued a written instruction;
the bond is needed solely for the principal’s benefit;
the cost is material;
the subcontract has a variation or change order mechanism.

E. Bond Amount Was Increased

If the contract required a bond for 10% of contract price, but the principal later required 30%, the additional premium may be treated as a variation or reimbursable cost unless the contract allows the principal to increase bond requirements at the subcontractor’s cost.

F. Bond Duration Was Extended Due to Principal-Caused Delay

If the project is delayed due to the principal’s acts, late site turnover, late approvals, design changes, delayed materials, or suspension orders, and the bond must be extended, the subcontractor may claim the additional extension premium as a delay cost.

G. Change Order Increased Contract Price

If a variation increases the subcontract price, the required bond amount may also increase. The additional premium attributable to the increased scope may be included in the variation cost if properly claimed.

H. Cost-Plus Arrangement

If the subcontractor is paid cost plus fee, bond premiums may be reimbursable as project cost, subject to contract terms.

I. Principal Agreed During Negotiation

Even if the final contract is not explicit, emails, minutes of meeting, bid clarifications, purchase order comments, or written approvals may show that the principal agreed to pay the bond premium separately.

J. Industry or Past Practice

If the parties have a prior course of dealing where the principal consistently reimburses bond premiums, that practice may support the subcontractor’s claim, especially where the current contract is silent and the principal accepted the same arrangement before.

IX. When the Subcontractor Usually Cannot Charge the Bond Cost Separately

A subcontractor may have weak grounds to charge the bond cost separately in the following situations.

A. Contract Says Bond Is at Subcontractor’s Expense

If the contract states that the subcontractor shall provide the performance bond “at its own cost” or “for its account,” the subcontractor generally cannot bill the principal separately.

B. Lump-Sum Price Includes All Costs

If the contract provides that the subcontract price is inclusive of all costs necessary for performance, the bond premium may be treated as included.

C. Bid Documents Required Bond From the Start

If the bond requirement was clear in the invitation to bid, tender documents, subcontract draft, or specifications, the subcontractor is expected to price it.

D. Subcontractor Did Not Reserve the Cost

If the subcontractor submitted a fixed price without excluding bond premium or identifying it as reimbursable, the principal may argue that the price includes the bond.

E. Subcontractor Voluntarily Obtained Bond

If the subcontractor obtained a bond for its own financing, internal policy, prequalification, or business convenience without the principal requiring it, reimbursement is unlikely.

F. Bond Secures Subcontractor’s Own Default

Because the bond protects the principal against the subcontractor’s nonperformance, the principal may argue that the cost is properly borne by the subcontractor as part of the security required to obtain the work.

G. Contract Prohibits Additional Charges

If the contract states that no additional charges will be paid unless covered by written change order, and no change order exists, the subcontractor’s claim may fail.

X. Government Procurement Context

Government projects require special care. Performance securities are common in government procurement.

A. Bidder or Contractor Usually Bears the Cost

In government procurement, the winning bidder or contractor is usually required to post performance security at its own expense as a condition for contract award and implementation. The cost is generally part of the bidder’s overhead and pricing.

If a subcontractor is engaged by a government contractor, and the subcontract requires the subcontractor to post a bond, the subcontractor’s ability to charge that cost depends on the subcontract.

B. Public Funds Require Clear Basis

A government agency cannot simply reimburse expenses without legal, contractual, and budgetary basis. Any claim for bond premium reimbursement must be supported by:

procurement documents;
contract provisions;
approved variation order;
notice of award terms;
official receipts;
proper billing;
accounting rules.

C. Subcontractor Usually Has No Direct Claim Against Government

If the subcontractor contracted only with the main contractor, the subcontractor usually bills the main contractor, not the government agency, unless there is direct contractual privity, assignment, direct payment arrangement, or legal basis.

D. Government-Mandated Additional Bond

If the government agency later imposes an additional bond requirement not in the original contract, the main contractor may seek adjustment if allowed. Whether that adjustment flows down to the subcontractor depends on the subcontract.

E. No Informal Reimbursement

Government procurement rules generally require formal documentation. Verbal approval from a government representative is risky and may not be enough.

XI. Private Construction Context

In private construction, parties have more contractual flexibility, subject to law and public policy.

Common arrangements include:

subcontractor bears bond cost;
main contractor reimburses bond cost;
bond cost included in mobilization;
bond cost included in preliminaries;
bond cost paid as reimbursable upon receipt;
bond cost split between parties;
principal pays only for additional or extended bond;
subcontractor provides bond in exchange for release of retention.

The key is written agreement.

XII. Performance Bond in Construction Subcontracts

Construction subcontracts commonly state that the subcontractor must provide performance security before mobilization or first payment.

Typical clauses may require:

performance bond equal to 10%, 15%, 20%, or 30% of subcontract price;
bond issued by acceptable surety company;
obligee as main contractor or owner;
bond valid until completion, turnover, or warranty period;
renewal before expiry;
replacement if surety becomes unacceptable;
right of principal to withhold payment until bond is submitted;
forfeiture or calling of bond upon default;
subcontractor to bear cost unless otherwise stated.

If the subcontractor wants reimbursement, the subcontract should say so clearly.

XIII. Performance Bond in Supply Contracts

Suppliers may be required to post a performance bond to guarantee delivery, installation, commissioning, or warranty.

Whether the supplier-subcontractor can charge the bond cost depends on pricing.

If the supplier’s quotation says “price excludes performance bond,” and the buyer later requires one, the supplier may bill it.

If the purchase order says “supplier shall provide performance bond at no additional cost,” the supplier generally bears it.

XIV. Performance Bond in Service Contracts

Service providers such as manpower agencies, security agencies, janitorial contractors, maintenance contractors, logistics providers, and facility management contractors may be required to post performance bonds.

The bond may secure:

faithful performance;
compliance with labor laws;
payment of wages and benefits;
protection against abandonment;
replacement of personnel;
damage to property;
service-level obligations.

If the service provider is a subcontractor, the bond premium is usually part of service cost unless separately reimbursable.

XV. Performance Bond vs. Insurance

Parties sometimes confuse performance bonds with insurance.

A. Insurance

Insurance protects against specified risks and the insurer may pay losses covered by the policy. The insured pays premiums to transfer risk.

B. Surety Bond

A surety bond guarantees performance. If the surety pays the obligee due to the principal’s default, the surety usually has recourse against the bonded party through indemnity agreements.

C. Cost Allocation

Insurance premiums and bond premiums may be treated differently in contracts. A contract may require the subcontractor to carry insurance at its own cost but allow reimbursement of bond premium, or vice versa.

The contract should specify both.

XVI. VAT and Tax Treatment of Bond Premium Reimbursement

If the subcontractor bills the principal for bond cost, tax treatment must be considered.

A. Reimbursement May Form Part of Gross Receipts or Revenue

A billed reimbursement may be treated as part of the subcontractor’s gross receipts or gross income unless it is a true pass-through or handled under proper accounting treatment. The tax effect depends on documentation and structure.

B. VAT or Non-VAT Treatment

If the subcontractor is VAT-registered, billing the principal for bond cost may be treated as part of the taxable consideration for services or construction, unless structured and documented otherwise. If the subcontractor is non-VAT, percentage tax or other tax treatment may be relevant.

C. Official Receipts and Invoices

The subcontractor should issue the appropriate BIR-registered invoice or receipt for amounts billed. If reimbursing actual cost, supporting official receipts from the surety should be attached.

D. Withholding Tax

Payments by the principal may be subject to withholding tax depending on the nature of the payment and payor status.

E. Documentary Stamp Tax

Surety bonds may involve documentary stamp tax or other charges. The contract should clarify whether these charges are included in the reimbursable bond cost.

XVII. Accounting Treatment

The accounting treatment depends on the nature of the arrangement.

A. Subcontractor Bears Cost

If the subcontractor bears the cost, the bond premium is recorded as an expense or deferred cost, depending on accounting policy and period covered.

B. Principal Reimburses Cost

If reimbursable, the subcontractor may record a receivable from the principal and recognize income or offset cost according to accounting standards and tax treatment.

C. Direct Payment by Principal

The principal may pay the surety directly. This avoids cash flow burden on the subcontractor but may still be treated as contract cost, depending on agreement.

D. Deduction From Progress Billing

The principal may advance the bond cost and deduct it from progress billings, if agreed.

XVIII. Documentation Needed to Charge the Principal

A subcontractor seeking reimbursement should prepare:

subcontract or purchase order;
clause requiring or authorizing bond reimbursement;
bid clarification;
quotation showing bond excluded or separately priced;
written instruction requiring bond;
approved change order;
surety quotation;
bond policy or certificate;
official receipt from surety;
computation of premium;
documentary stamp tax details;
proof of payment;
invoice to principal;
correspondence showing approval;
proof of bond submission and acceptance;
renewal notices, if claiming extension premium.

Without documentation, reimbursement may be denied.

XIX. Sample Contract Clauses

A. Bond Cost for Subcontractor’s Account

The Subcontractor shall, at its own cost and expense, procure and maintain a performance bond in the amount of __________, issued by a surety company acceptable to the Principal, valid until __________. The cost of such bond shall be deemed included in the Subcontract Price.

This clause favors the principal.

B. Bond Cost Reimbursable by Principal

The Subcontractor shall procure a performance bond in the amount required by the Principal. The premium, documentary stamp tax, and related charges for the bond shall be reimbursed by the Principal at actual cost upon submission of official receipts and a copy of the issued bond.

This clause favors reimbursement.

C. Bond Cost Included Except for Extensions Caused by Principal

The cost of the initial performance bond shall be for the account of the Subcontractor and deemed included in the Subcontract Price. Any extension or renewal of the bond required due to delays, suspensions, or variations attributable to the Principal shall be reimbursed by the Principal at actual cost.

This is a balanced clause.

D. Bond Required Only Upon Written Instruction

If the Principal requires a performance bond not expressly included in the original scope or pricing, the Subcontractor shall provide the bond upon written instruction, and the bond premium and related charges shall be treated as a reimbursable cost or variation.

This protects the subcontractor from surprise requirements.

E. Bond Premium as Separate Pay Item

The Contract Price shall consist of the Work Price of __________ and a separate reimbursable bond cost of __________, subject to adjustment based on actual premium charged by the surety.

This clarifies pricing.

XX. Quotation Language for Subcontractors

Subcontractors should avoid ambiguity in quotations.

A. If Bond Is Included

Price is inclusive of performance bond premium required under the bid documents.

B. If Bond Is Excluded

Price excludes performance bond, surety bond, advance payment bond, warranty bond, documentary stamp tax, and related surety charges. If required, these shall be billed separately at actual cost plus applicable taxes.

C. If Bond Depends on Amount and Duration

Performance bond cost, if required, shall be computed based on the required bond amount, bond form, surety provider, validity period, and obligee requirements, and shall be subject to separate approval.

D. If Bond Extension Is Extra

Any extension, renewal, or increase of bond coverage due to project delay, change order, or principal instruction shall be for the account of the principal.

Clear quotation language prevents disputes.

XXI. Change Orders and Bond Costs

Bond costs often change when the project changes.

A. Increased Contract Amount

If the subcontract amount increases, the required bond amount may also increase. The subcontractor should include additional bond premium in the variation claim.

B. Extended Completion Date

If the project completion date is extended, the bond validity may need extension. The additional premium should be allocated based on who caused the delay.

C. Change in Obligee

If the principal requires the bond to be reissued in favor of a different obligee, additional charges may arise.

D. Change in Bond Form

Some obligees require special bond wording, on-demand bonds, unconditional guarantees, or specific surety forms. These may cost more.

E. Delayed Release of Bond

If the principal delays acceptance, turnover, punchlist closure, or issuance of completion certificate, the subcontractor may be forced to extend the bond. The cost may be claimable if delay is not the subcontractor’s fault.

XXII. Bond Renewal and Extension Costs

A performance bond may expire before the project is completed or before the principal releases the subcontractor.

Who pays renewal cost depends on cause.

A. Delay Caused by Subcontractor

If delay is due to subcontractor fault, the subcontractor usually bears renewal cost.

B. Delay Caused by Principal

If delay is due to principal’s late approvals, site unavailability, delayed materials, design changes, suspension, or late payment, the subcontractor may claim renewal cost.

C. Neutral Delay

For force majeure, regulatory delay, or shared delay, cost allocation depends on contract.

D. Warranty Period Extension

If the bond must remain valid through warranty or defects liability period, that should be priced from the start. If later imposed, it may be reimbursable.

XXIII. Bond Cost and Retention

Some principals withhold retention money, commonly a percentage of progress billings, to secure performance.

A subcontractor may ask to replace retention with a retention bond. The cost of a retention bond is usually borne by the subcontractor because it benefits the subcontractor by releasing cash flow, unless the contract says otherwise.

If the principal requires both retention and a performance bond, the subcontractor should price both or negotiate.

XXIV. Bond Cost and Mobilization Advance

If the principal gives an advance payment or mobilization fund, it may require an advance payment bond. That bond is distinct from a performance bond.

The cost may be:

borne by subcontractor;
reimbursed by principal;
deducted from advance;
included in mobilization cost.

Because the advance benefits the subcontractor’s cash flow, principals often require the subcontractor to pay the advance payment bond premium.

XXV. Can the Subcontractor Add Markup on Bond Cost?

A subcontractor may add markup only if the contract allows it or the principal agrees.

A. Actual Cost Reimbursement

If the contract says reimbursement “at actual cost,” markup is generally not allowed.

B. Cost Plus Markup

If reimbursable costs are subject to overhead and profit markup, the subcontractor may add the agreed percentage.

C. Administrative Handling Fee

A subcontractor may charge an administrative fee if stated in the quotation or agreed.

D. Taxes

Even if no markup is allowed, applicable taxes may still affect the billed amount. The contract should clarify whether reimbursement is tax-inclusive or tax-exclusive.

XXVI. Can the Principal Deduct Bond Cost From the Subcontractor?

Yes, if the subcontract says the subcontractor must provide the bond and fails to do so. The principal may procure the bond or security and deduct the cost if authorized by contract.

But without a contractual basis, unilateral deduction may be disputed.

Principal deduction may be justified where:

subcontractor failed to submit required bond;
principal obtained substitute bond;
contract allows back-charging;
subcontractor agreed in writing;
cost was necessary due to subcontractor default.

A principal should provide notice, documentation, and computation before deducting.

XXVII. If the Principal Requires a Specific Surety Company

If the principal requires a particular surety company or restricts acceptable sureties, and this increases the premium, the subcontractor may seek adjustment if the requirement was not disclosed before pricing.

If disclosed from the start, the subcontractor should have priced it.

If the principal later rejects a reasonably acceptable surety and demands a more expensive one, the extra cost may be claimable.

XXVIII. If the Bond Is Required by the Project Owner, Not the Main Contractor

A subcontractor engaged by a main contractor may be required by the project owner to issue a bond in favor of the owner. The subcontractor should ask:

Was this requirement in the subcontract?
Did the main contractor disclose it during bidding?
Is the obligee the owner or main contractor?
Is the bond for the subcontractor’s scope only?
Does the main contract require it?
Is the bond cost included in the subcontract price?
Will the owner reimburse the main contractor?
Will the main contractor reimburse the subcontractor?

If the owner’s requirement was known to the main contractor but not disclosed to the subcontractor, the subcontractor may argue for additional compensation.

XXIX. If the Bond Requirement Is Imposed by Law

Some projects or industries may require bonds by law, regulation, permit condition, or procurement rule.

If the legal requirement is known and inherent in the work, the subcontractor is generally expected to comply at its own cost unless the contract states otherwise.

If a new legal requirement arises after contract signing, the cost may be treated under change in law provisions if the contract contains one.

XXX. Change in Law and New Bond Requirements

If a law, regulation, local ordinance, permit condition, or government requirement changes after contract execution and requires a new or higher bond, the subcontractor may claim additional cost under:

change in law clause;
variation clause;
equitable adjustment;
force majeure-related provisions;
hardship or renegotiation clause;
general contract principles, depending on facts.

Without a change-in-law clause, recovery may be more difficult but not impossible if the principal instructed compliance and benefited from it.

XXXI. What If the Contract Is Silent?

If the contract is silent, the answer depends on interpretation.

Relevant factors include:

Was the bond required in bid documents?
Did the quotation include or exclude bond cost?
Is the contract lump-sum or cost-plus?
Was the bond necessary for the subcontractor’s performance?
Who benefits from the bond?
Who is the obligee?
What is industry practice?
Did the principal request the bond after price agreement?
Did the subcontractor reserve the right to reimbursement?
Did the principal approve the premium?
Did the parties previously reimburse such costs?
Are there emails or meeting minutes discussing it?

In many fixed-price contracts, silence may work against the subcontractor because required performance costs are presumed included. But if the bond was newly imposed or extraordinary, the subcontractor may have a fair claim.

XXXII. Contract Interpretation Principles

Philippine contract interpretation generally looks at the parties’ intent, contract language, surrounding circumstances, and conduct.

Relevant principles include:

contracts have the force of law between the parties;
obligations arising from contracts must be complied with in good faith;
clear terms control;
ambiguous terms may be interpreted against the party who caused the ambiguity;
parties’ contemporaneous and subsequent acts may show intent;
usage or custom may aid interpretation when not contrary to law;
no party should unjustly enrich itself at another’s expense;
one cannot demand payment not supported by contract, law, or equity.

Applied to bond costs, the question is whether the parties intended the bond premium to be included in the subcontract price or reimbursed separately.

XXXIII. Unjust Enrichment Argument

A subcontractor may argue unjust enrichment if the principal required a bond after the price was fixed, received the benefit of the bond, and refused to pay for a cost not contemplated by the agreement.

This argument is stronger when:

the bond was not required in the original contract;
the principal demanded it later;
the subcontractor objected or reserved rights;
the principal accepted the bond;
the bond benefited only the principal;
the subcontractor incurred actual documented cost.

It is weaker when the subcontractor agreed to provide the bond as part of the deal.

XXXIV. Good Faith and Fair Dealing

Both parties should act in good faith.

A principal should not:

hide bond requirements during bidding;
impose new bond requirements after award without adjustment;
delay bond release to force extensions;
reject reasonable sureties arbitrarily;
require excessive bond amounts unrelated to risk;
demand reimbursement-free bond after accepting an excluded quotation.

A subcontractor should not:

omit known bond costs from bid and later surprise-bill the principal;
obtain unnecessary expensive bonds without approval;
add markup when only actual reimbursement is allowed;
delay bond submission;
use unacceptable surety;
allow bond to lapse;
claim reimbursement without receipts.

XXXV. Practical Examples

Example 1: Contract Requires Bond at Subcontractor’s Cost

A subcontract states: “Subcontractor shall submit a performance bond equivalent to 10% of the subcontract price at its own expense.”

The subcontractor cannot normally charge the principal separately.

Example 2: Quotation Excludes Bond

The subcontractor’s quotation says: “Price excludes performance bond. If required, premium shall be billed at actual cost.” The principal issues a purchase order based on the quotation and later requires the bond.

The subcontractor has a strong basis to charge the bond premium.

Example 3: Contract Silent, Bid Documents Required Bond

The invitation to bid required a performance bond, but the subcontractor’s quotation did not mention it. The contract is lump-sum.

The bond cost is likely included in the price.

Example 4: Principal Adds Bond Requirement After Award

The signed subcontract did not require a bond. One month later, the principal requires a 20% performance bond before allowing mobilization.

The subcontractor may request a change order or reimbursement.

Example 5: Delay Caused by Principal

The subcontractor submitted a one-year performance bond. The project was delayed six months because the principal failed to turn over the site. The principal requires bond extension.

The subcontractor may claim the extension premium as delay-related cost.

Example 6: Delay Caused by Subcontractor

The subcontractor is late due to poor manpower and defective work. The bond expires and must be extended.

The subcontractor likely bears the extension premium.

Example 7: Government Contract

A government contractor subcontracts electrical works. The subcontract requires the subcontractor to provide a performance bond. The subcontract price is lump-sum and includes all costs.

The subcontractor generally bears the bond premium unless the subcontract says otherwise.

XXXVI. Disputes Over Bond Cost

Disputes may arise over:

whether the bond was required;
whether the cost was included;
whether reimbursement was approved;
whether the premium is reasonable;
whether taxes are reimbursable;
whether renewal costs are due to delay;
whether the bond amount is excessive;
whether the principal can reject the surety;
whether the subcontractor can suspend work pending reimbursement;
whether unpaid bond cost can be included in progress billing;
whether the cost is subject to retention;
whether withholding tax applies.

A written record is critical.

XXXVII. How Subcontractors Should Protect Themselves

Subcontractors should:

Review bid documents carefully.
Ask whether performance bond is required.
Identify bond amount, form, obligee, and duration.
Obtain surety quotations before submitting price.
State clearly whether bond cost is included or excluded.
Include bond extension cost rules.
Clarify taxes, documentary stamps, and fees.
Require written approval before obtaining reimbursable bond.
Attach official receipts to billings.
Avoid relying on verbal approval.
Reserve rights if bond is newly imposed.
Include bond cost in change order claims.
Track bond expiry dates.
Request timely release or cancellation of bond.
Document delays causing bond extensions.

XXXVIII. How Principals Should Protect Themselves

Principals should:

State bond requirements in tender documents.
Specify whether bond cost is included in price.
Identify acceptable sureties.
State bond amount and validity period.
Require bond before mobilization or first billing.
Provide a standard bond form.
Require renewal before expiry.
State who pays extension premiums.
Avoid imposing new requirements without price adjustment.
Reject unclear quotations.
Require official receipts for reimbursable costs.
Prohibit markup unless agreed.
Include back-charge rights for failure to provide bond.
Define release conditions.
Document acceptance or rejection of bonds.

XXXIX. Recommended Bond Cost Clause for Balanced Contracts

A balanced clause may state:

The Subcontractor shall provide a performance bond equivalent to ___% of the Subcontract Price, valid until __________. The premium for the initial bond shall be included in the Subcontract Price, unless separately stated in the Schedule of Prices. If the Principal requires an increase in bond amount, change in bond form, change in obligee, or extension of validity due to causes not attributable to the Subcontractor, the additional premium and related charges shall be treated as a variation and reimbursed upon submission of official receipts. Extensions required due to Subcontractor delay or default shall be for the Subcontractor’s account.

This type of clause avoids many disputes.

XL. Demand Letter for Reimbursement

A subcontractor claiming reimbursement may write:

Subject: Request for Reimbursement of Performance Bond Premium

We refer to your instruction dated __________ requiring us to secure a performance bond in the amount of __________ for the project __________.

Our original quotation/contract did not include the cost of said bond, or expressly provided that bond premium would be reimbursable. We secured the required bond from __________, valid from __________ to __________, and paid the premium and related charges in the amount of __________.

Attached are the bond, official receipt, surety invoice, and supporting documents.

We respectfully request reimbursement of the actual bond cost in accordance with the contract / approved instruction / quotation terms. This request is without prejudice to any additional cost arising from required extensions, increases, or changes in bond terms not attributable to us.

XLI. Principal’s Response Denying Reimbursement

A principal denying reimbursement may state:

Subject: Response to Request for Performance Bond Reimbursement

We refer to your request for reimbursement of performance bond premium. The subcontract documents required the submission of a performance bond as part of your obligations, and the subcontract price was agreed on a lump-sum basis inclusive of all costs necessary for performance.

There is no approved change order, reimbursable cost provision, or written instruction authorizing separate payment of the bond premium. Accordingly, the requested reimbursement is denied.

This is without prejudice to review of any additional bond extension cost caused solely by principal-directed delay, if properly documented under the contract.

XLII. Negotiated Settlement

Even where the contract is unclear, parties may settle commercially.

Possible settlement options include:

principal reimburses actual cost without markup;
cost split 50/50;
cost included in next variation;
principal pays extension premiums only;
subcontractor absorbs initial bond but principal pays increased bond amount;
principal releases retention earlier in exchange for subcontractor absorbing bond cost;
reimbursement treated as advance deductible from future billings;
principal pays bond directly to surety.

A settlement should be written and should state whether it is full and final for that cost.

XLIII. Arbitration and Dispute Resolution

Construction and commercial contracts may contain dispute resolution clauses, such as:

negotiation;
engineer or project manager determination;
mediation;
adjudication;
arbitration;
Construction Industry Arbitration Commission proceedings;
regular courts.

Before suing, parties should check the contract’s dispute resolution clause. Failure to follow the agreed process may delay or weaken the claim.

XLIV. Evidence in a Bond Cost Dispute

Important evidence includes:

invitation to bid;
instructions to bidders;
subcontract;
purchase order;
quotation;
exclusions list;
clarification responses;
emails;
meeting minutes;
bond requirement letter;
surety quotations;
bond policy;
official receipts;
payment vouchers;
progress billings;
change orders;
delay notices;
extension requests;
completion certificates;
bond release correspondence;
previous contracts between parties.

The question is not only whether the subcontractor paid a bond premium, but whether the principal agreed or is legally required to reimburse it.

XLV. Can the Subcontractor Refuse to Provide a Bond Unless Principal Pays?

If the contract requires the subcontractor to provide a bond, refusal may be breach of contract.

If the bond requirement is new or disputed, the subcontractor should not simply refuse without documenting its position. A safer approach is:

ask for written instruction;
reserve rights;
request change order or reimbursement;
provide bond if necessary to avoid delay, under protest if appropriate;
pursue reimbursement through contract process.

If the subcontractor refuses and delays the project, it may face termination, liquidated damages, or replacement.

XLVI. Can the Subcontractor Suspend Work for Nonpayment of Bond Cost?

Only if the contract or law allows suspension and the procedural requirements are met.

Suspending work over a disputed reimbursable cost can be risky, especially if the amount is small compared with the project or if the contract requires continuing performance pending dispute resolution.

Before suspending, the subcontractor should check:

suspension clause;
notice requirements;
cure periods;
payment default provisions;
dispute resolution clause;
risk of termination;
consequences for delay;
whether the bond cost is undisputed or disputed.

XLVII. Can the Principal Withhold Payment Until Bond Is Submitted?

Yes, if the contract requires submission of a performance bond as a condition for mobilization, first payment, or progress billing.

A principal may validly withhold payment where:

bond submission is a condition precedent;
subcontractor failed to provide required bond;
bond is defective, expired, or from unacceptable surety;
bond amount is insufficient;
bond form does not comply.

But withholding should be proportional and contract-based.

XLVIII. Release or Cancellation of the Bond

Subcontractors should not forget to secure release of the bond after obligations are completed.

The contract should state when the bond is released:

upon final completion;
upon acceptance;
after punchlist completion;
after warranty period;
upon issuance of certificate of completion;
upon replacement by warranty bond;
after final payment;
upon return of advance payment;
upon expiration, if no claim.

If the principal delays bond release without basis, the subcontractor may incur additional premiums. These may be claimable if the delay is attributable to the principal.

XLIX. Performance Bond and Liquidated Damages

A performance bond may be called if the subcontractor defaults. Liquidated damages may also be imposed if delay or breach occurs.

The bond does not necessarily limit the subcontractor’s liability unless the contract says so. The principal may claim:

liquidated damages;
cost to complete;
defect rectification costs;
damages beyond bond amount, if allowed;
attorney’s fees and expenses, if provided;
indemnity.

A subcontractor should not assume that losing the bond is the only consequence of default.

L. Performance Bond and Surety’s Right of Reimbursement

When a surety issues a bond, it usually requires the subcontractor and its owners or indemnitors to sign an indemnity agreement. If the surety pays the obligee, the surety may seek reimbursement from the subcontractor or indemnitors.

This means the bond is not the same as insurance that simply absorbs the loss. It protects the obligee, but the bonded subcontractor may still ultimately bear the cost of default.

This is relevant to pricing and risk assessment.

LI. Practical Checklist for Subcontractors Before Signing

Before signing a subcontract, ask:

Is a performance bond required?
What percentage of contract price?
Who is the obligee?
What bond form is required?
Which surety companies are acceptable?
How long must the bond remain valid?
Does it cover warranty period?
Is the premium included or reimbursable?
Are documentary stamps and taxes reimbursable?
Who pays for extensions?
What if project is delayed by principal?
What if contract amount increases?
When will bond be released?
Can retention be replaced by bond?
Is bond cost subject to markup?
Is reimbursement subject to withholding tax?

LII. Practical Checklist for Principals Before Award

Before awarding, principals should confirm:

tender documents disclosed bond requirement;
bidders priced bond cost properly;
contract states cost allocation;
bond amount and duration are clear;
bond form is attached;
surety acceptability is defined;
reimbursement rules are clear;
extension cost allocation is clear;
bond submission deadline is clear;
consequences of failure are clear;
bond release conditions are clear;
change order impact on bond is clear.

LIII. Frequently Asked Questions

1. Can a subcontractor charge the performance bond cost to the principal?

Yes, if the contract, quotation, purchase order, change order, or written agreement allows it. Without such basis, the cost is usually borne by the subcontractor if the bond was part of its obligations.

2. If the principal requires the bond, does the principal automatically pay for it?

No. A principal may require a bond as a condition of contract, and the subcontractor may still bear the cost if the contract so provides or if the cost is included in the price.

3. If the contract is silent, who pays?

In a lump-sum subcontract where the bond requirement was known, the subcontractor usually bears it. If the bond was imposed after contract signing or was not disclosed, the subcontractor may claim reimbursement.

4. Can the bond cost be passed through as a reimbursable expense?

Yes, if the contract is cost-plus, reimbursable, or expressly allows pass-through of bond premiums.

5. Can a subcontractor add profit or markup to the bond premium?

Only if agreed. If reimbursement is at actual cost, markup is generally not allowed.

6. Who pays for bond extension?

If extension is due to subcontractor delay, the subcontractor usually pays. If due to principal-caused delay or change order, the principal may be liable if the contract or circumstances support it.

7. Can a principal refuse payment if the bond is not submitted?

Yes, if bond submission is a contractual condition for payment or mobilization.

8. Can a subcontractor refuse to provide the bond if reimbursement is disputed?

Refusal may be risky if the contract requires the bond. The subcontractor should reserve rights and follow the dispute process.

9. Is bond premium part of construction cost?

Often yes. In fixed-price contracts, it is commonly included in contractor overhead or preliminaries unless separately stated.

10. Can the principal demand a specific surety?

Yes, if the contract allows it or if reasonable. If the requirement is imposed later and increases cost, the subcontractor may seek adjustment.

11. Is a performance bond the same as insurance?

No. A surety bond guarantees performance. If the surety pays, it may seek reimbursement from the subcontractor.

12. Can a government agency reimburse bond cost?

Only if there is clear legal, contractual, procurement, and budgetary basis. Informal reimbursement is not enough.

13. Can bond cost be included in a variation order?

Yes, especially if the variation increases contract amount, requires higher bond coverage, or extends project duration.

14. What if the subcontractor forgot to include bond cost in its bid?

If the bond requirement was disclosed, the subcontractor may have to absorb the cost. Mistake in pricing is usually not enough to charge the principal.

15. What document best protects the subcontractor?

A clear quotation or contract clause stating that the price excludes performance bond and that any required bond premium is reimbursable at actual cost.

LIV. Common Mistakes

Avoid these mistakes:

Assuming the principal automatically pays because it required the bond.
Assuming the subcontractor always pays without checking the contract.
Failing to state whether bond cost is included or excluded.
Submitting a lump-sum bid without pricing required bond.
Relying on verbal promises of reimbursement.
Forgetting documentary stamp tax and related charges.
Ignoring bond extension costs.
Allowing bonds to expire.
Failing to claim bond cost in change orders.
Using a surety not acceptable to the obligee.
Signing a bond form with broader obligations than the subcontract.
Failing to secure release of bond after completion.
Treating bond like insurance without understanding surety indemnity.
Billing reimbursement without official receipts.
Adding markup without agreement.

LV. Key Legal Principles

The key principles are:

Contract controls. The parties’ agreement determines whether the bond cost is included, reimbursable, or separately billable.
A bond requirement does not automatically mean reimbursement. A principal may require a bond at the subcontractor’s expense.
Lump-sum pricing usually includes known bond costs. If the requirement was disclosed, the subcontractor should price it.
New or increased bond requirements may justify adjustment. If imposed after contract signing, reimbursement or variation may be proper.
Delay-caused extensions follow responsibility for delay. The party responsible for extending the project may bear additional bond premium, depending on contract.
Documentation is essential. Quotation exclusions, written instructions, official receipts, and change orders determine recovery.
Government projects require strict authority. Public reimbursement needs clear contractual and legal basis.
Bond premiums may have tax consequences. Reimbursement may affect invoicing, VAT, withholding, and income recognition.
A surety bond is not simple insurance. If the bond is called, the surety may seek reimbursement from the subcontractor.
Ambiguity creates disputes. Clear clauses on bond amount, duration, cost, extension, and release prevent litigation.

LVI. Conclusion

A subcontractor may charge the cost of a performance bond to the principal only when there is a contractual, documentary, or legal basis to do so. The clearest bases are an express reimbursement clause, an accepted quotation excluding bond cost, a bill of quantities pay item, an approved change order, or a principal’s post-contract instruction requiring a new, increased, or extended bond.

If the subcontractor entered into a lump-sum subcontract knowing that a performance bond was required, the bond premium is usually treated as part of the subcontractor’s cost and cannot be charged separately. If the bond requirement was imposed later, increased beyond the original terms, extended because of principal-caused delay, or required for the principal’s special benefit outside the agreed scope, reimbursement may be justified.

For subcontractors, the practical rule is to state clearly in every quotation whether bond cost is included or excluded. For principals, the practical rule is to disclose bond requirements in the tender and state who pays. For both sides, the safest contract language covers the bond amount, obligee, form, acceptable surety, duration, premium, taxes, renewal cost, change-order effect, and release conditions.

In Philippine contracting practice, disputes over performance bond costs usually arise not because bonds are unusual, but because the parties failed to say who pays. Clear drafting, written approvals, proper receipts, and timely claims are the best protection.