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Contractor Surety Bonds

November 13, 2023

Rest Assured With Contractor Surety Bonds

The construction business has its share of risks — from worker safety to the threat of default. While a good first step is to check if a contractor is licensed and insured, you may need to further protect your interests by requiring that a contractor be bonded.

Many contractors advertise they are “bonded.” This generally refers to the fact they are licensed by the province or municipality and are commercially bonded. Commercial surety bonds do afford property or project owners some degree of protection. However, they don’t provide the full extent of coverage found in other types of surety bonds that are issued on a per-contract basis.

To be sure, a licence or permit bond may cover the cost of an unpaid supply bill or of unpaid workers. Some bonds also cover damage to your property as a result of negligence and lost or stolen property.

In order to receive relief, you must contact the contractor’s surety company and provide proof that the contractor hasn’t met its obligations. Contractors have a bond number and certification, which you’re entitled to ask for and check before you decide to hire.

Consider a contract bond

For larger projects, it makes sense to require your primary contractors obtain additional surety bonds known as contract bonds. These fall into three basic categories:

  1. Bid bond: Protects you if a bidder is awarded a contract but fails to sign the contract or provide the required performance and payment bonds.
  2. Performance bond: Guarantees that, in the event of a contractor’s default, the contract is completed.
  3. Payment bond: Ensures that certain subcontractors and suppliers will be paid for labour and materials incorporated into a construction contract.

Many government agencies require contractors to obtain performance and payment bonds when they submit a construction bid, and often the bond must equal 100% of the contract amount. Requiring contract bonds for private projects is a good idea as well.

To bond a project, you would specify your bonding requirements in the contract documents. Obtaining the bonds and delivering them to you is the responsibility of the contractor.

You may also wish to require that key subcontractors obtain surety bonds to help the prime contractor manage its risk, particularly when the subcontractor is a significant part of the job or has a specialized skill that is difficult to replace.

Insist that your contractor obtain its bonding from a licensed, reputable surety company. Most sureties are divisions of insurance companies and are licensed and regulated by provincial regulatory bodies.

The benefits of prequalification

The major benefit of requiring a contract bond is the prequalification process, which weeds out potentially unqualified contractors. Sureties review a contractor’s financial statements, tax returns, balance sheets, work-in-progress schedules, etc., as well as references and letters of recommendation. In addition, sureties evaluate the risk of the contract, the contractor’s overall work portfolio, past performance, work history, operational efficiency, managerial skills, reputation and character.

This gives you peace of mind knowing they have been thoroughly vetted by an independent third party. When the surety issues a bond it believes the contractor is competent and qualified to do the work.

While contract bonds are not the only risk-mitigation tools available, they are probably the most effective. Letters of credit and liens may provide financial compensation if a contractor defaults, but they don’t provide 100% performance and payment protection or guarantee the project will be completed and workers paid. Surety bonds shift the risk of default from you to the surety, which can be an enormous liability.

An extra layer of protection

When a contractor is bonded, the surety company stands behind its assessment that there is low risk of default — but, if a default does occur, the surety will step in and assume financial responsibility for completing the job. Bonding can also guarantee that workers and suppliers will be paid. No other risk-mitigation tool provides these benefits.

If you have any additional questions regarding surety bonding, contact your insurance broker.

This content is for informational purposes only and not for the purpose of providing, financial, medical or legal advice. You should contact your attorney, doctor, broker or advisor to obtain advice with respect to any particular issue or problem. Copyright © 2020 Applied Systems Inc. All rights reserved.