The construction industry is more risky than any other industry which needs a proper risk management system. Construction insurance is the common means of transferring construction risks in construction contracts. However, there are also non-insurable risks which are handled through construction securities as a risk management tools. Non performance is a non-insurable risk which is transferred through performance security to the contractor or the issuing company. The research is conducted to explore the challenges in the enforcement of performance security in the construction industry in Ethiopia. The research has both a doctrinal and empirical approaches with the qualitative data collection and data analysis mechanisms. There are mainly two challenges identified in the enforcement of performance security. First, to determine the nature of performance security, whether it is an insurance policy or a surety contract, and the regulatory legal regime; and whether performance security is a conditional or unconditional instrument, are the contested problems. Secondly, the application of performance security concerns the amount of the security entitled to the employer to cover the damage the employer suffered due to the default of the contractor is another problem. The sufficiency of the performance security to compensate the employer’s damage suffered is also another practical dispute. The researcher concluded that the very nature of performance security more adheres to the surety ship contract rather than the insurance policy. The number of parties involved in the performance security, the purpose of the performance security in the contracts, and the court decisions substantiated that the performance security is a surety. There is no uniform application of cases on the conditionality of performance security in the construction contracts. On the second issue, the researcher concluded that the right of the employer on the performance security should be limited to the extent of damage suffered due to the contractor’s default. In addition, the maximum liability of the surety is limited to the value of the performance security. On the other hand, the amount of the performance security doesn’t sufficient to indemnify the employer’s economic loss due to the nonperformance of the contractor. The researcher recommends that the draft commercial code should include provisions which regulate the forms of performance security, the procurement directive and the Standard Bidding Document be amended in the way to avoid the contests on the nature and application of performance security. In addition, the courts should develop a similar and predictable decisions in relation to the conditionality of performance security