I just had a prospect ask me for a performance bond. I know this is requested for construction projects but no one has ever asked me for one for consulting. Is this common, or becoming more common, for consultants?
A performance bond is a partial guarantee issued by an independent bank or insurance company to assure some compensation to your client if you do not provide the contracted services. You would normally either set aside or deposit funds in an escrow account in amounts equivalent to a minor portion of the account value (10% is common but the amount reflects the perceived risk of loss). The bond term is usually for part of the term of the project, usually up to the point of a major milestone, after which the bond is released.
A performance bond is rare for consulting engagements because most management consulting engagements are based on personal referrals and trust between the client and consultants. Also, the amounts at risk and difficulty of replacement are higher for construction projects than consulting. Ultimately, the nature of consulting, with few advanced purchases of materials and physical or facility-related activities, means that there is just not that much at risk for a consulting client.Tip:
If a prospect requests a performance bond, ask about their underlying assumptions. Are they new to using management consultants and thinking in terms of a construction contract? What, exactly, are their assumed risks? Can you provide convincing referrals from other clients whom you have successfully served without a bond? If there is so little trust that a performance bond is required, consider the implications of this level of trust on other aspects of the engagement.© 2009 Institute of Management Consultants USA