Surety bond (Construction Bonds) also known as contractor bonds is a legal guarantee issued by an insurance company (Surety) that provides financial protection to the hiring party (Obligee) in the event a contractor (Principal) defaults on a job, does not complete the project in time, or fails to deliver up to adequate standard that was agreed before the construction contract started.
We provide bonds to over 100 different types of businesses across Canada. Have a construction job coming up that requires you to post a bond? We can help!
Many Canadian citizens understand very little about what surety is. They may have a basic understanding of the phrase and functionality of the bonds, but they do not understand them in their entirety or know precisely how they work. This is truly a mistake, since it is possible for anyone to need to present a bond in the future as a form of a guarantee. Although they’re incredibly helpful for construction contractors and subcontractors, these aren’t the only entities that may need to invest their time and efforts to acquire a bond at some point in the future. Within this guide, you’ll learn all about bonds in Canada, so you’ll be better prepared, if you are ever required to obtain any bond your business might need.
The basics that you must know before looking into bonding of any sort
Before moving any further, you should take the time to familiarize yourself with the surety definition and basics of surety insurance. Like mentioned above, this is nothing more than an agreement between three individualistic parties. In a surety agreement, one entity, which is referred to as the principal, will agree to pay the second entity, which is known as the obligee, if they’re unable to fulfill their obligation, as set forth in the contract. Although this type of bond can be immensely beneficial for both sides, it ultimately provides the obligee with added peace of mind, since they can guarantee that the surety will cover any losses incurred, due to a failure on the principal’s end.
These security/guarantee bonds require the volunteer involvement of three parties, the obligee (project owner), principal (contracting company), and the surety (bond/insurance company). In order for the surety definition to be validated, each party will need to agree on the contract’s terms and guidelines, and then provide their signature on the document. This validates the bond and makes it a legal document in the eyes of the judicial system.
Recipient Party also known as the Obligee
This contractual guarantee is put into place to protect the obligee from financial loss, which can occur at any time throughout the development phase. The surety guarantee can also ensure the obligee that the contractor is a reputable business owner within the community. A surety will not bond a contractor without completing a full investigation with a thorough background check.
In order to understand precisely how the suretyship works, you need to learn about the three parties that are involved. The principal is normally a business, contractor or someone, who is carrying out a service. This entity guarantees that they’ll fulfill their contractual obligation in a timely and satisfactory manner and they maintain the brunt of the responsibility. In the construction industry, a contractor would utilize a sureties guarantee as a promise that they’d complete the project as specified within the contractor.
In Canada, the surety is the entity, which has assigned the indemnity agree (bond). Although the surety usually remains hands-off, they will be required to enter the picture, if the principal fails to deliver. If the obligee files a complaint against the principal, the surety will be required to investigate the claim and rule on the outcome. If they rule in the favor of the obligee, they’ll be able to proceed in a handful of ways. Although it is possible for the surety company to pay the obligee, they may also decide to find a new principal to finish the contractual obligation.
What exactly is this bond? How does it work & what is the cost?
First of all, great decision to look into bonding. You are now one step closer to where the big boys with gigantic margins play. More and more jobs across all provinces in Canada are becoming bond exclusive – meaning you will have to provide a bond to even qualify to bid on a project. The great news is, over 80% of construction companies DO NOT have access to bonding in Canada.
When you are a bonded company and bid on jobs, you more than likely will be competing with only 1, 2 , or 3 other competitors in most cases unless the job is very main stream. So what does this advantage of less competitors do? You guessed it, you land more jobs. Not to mention, since companies that are bonded or in other words can provide a bond are rare to find, they usually charge well above the actual project cost. Why are they able to do this? Well simply because they can as there isn’t enough competition that is bringing down the price.
Before anything, understand one thing. Working with an insurance company and getting a bond is much simpler than the industry makes it seem. These bonds in the simplest words are financial guarantees that provide protection to whoever is hiring you. Because there is a risk of your company defaulting a job or not finishing it as promised, the bond provides an opportunity to the party hiring you to recover from any financial damages and loss of time caused by your company.
Project owners, governing bodies, municipalities, and private builders are now more than ever starting to financially secure themselves by demanding the companies they hire to post a construction bond BEFORE the job even begins.
This means that you as business now have to be backed up, in advance, by an insurance company. So before the job begins, the hiring party (Legally referred to as the Obligee) receives the bond then gives you the green light to begin.
After the job has begun, the way the bond works is if your company (Legally refereed to as the Principal) fails to do the job for any reason, the bond you posted gets cashed by the obligee and the insurance company (Legally referred to as the Surety) pays out. If the job does not complete how it was suppose to be completed, the bond is cashed. Simple.
Since the insurance company is taking the risk of putting a bond out there for you, they contractually make you agree that you, any partners, and your company are responsible for the amount they have to pay out in case you do not complete a job and the bond is cashed. So if a bond is cashed, the insurance company pays the party cashing the bond, and then you pay the insurance company back.
IN MOST CASES – It never gets down to you paying out personally as instead of coming after you, the insurance company works out a deal with another construction company to finish the job before the bond is even cashed by the obligee.
Also keep in mind that getting contractor bonds is NOT FREE. You can expect to pay approximately 1% of the total contract value as the cost to the insurance company to get the bond. This cost is upfront and is paid by the company getting bonded to the insurance company before the bond is released to them.
Key Benefits of Being a Bonded Company
Luckily, being setup for bonding is super beneficial and saves you a ton of cash. Traditionally, when you take on a significant size job, you would have to put some sort of a collateral, usually a large cash deposit or some property, as a guarantee for the party hiring you that the job will be done. If you fail to complete your part of the deal, you lose whatever you put as collateral.
But if you can post a bond, you have to put up NOTHING. The bond itself acts a guarantee and it satisfies the bonding requirements that the hiring party has while allowing you to have tremendous cash flow that you can use towards the job itself.
When you setup an agreement with a bond provider to back you up for the jobs you do, they agree to offer a bond, which is either piece of paper or electronic (E-Bonding) and then you take that document and provide it to whoever that requires it.
Bonding for Construction Projects
A Construction bond is a legal agreement that provides a guarantee to your client that YOU will deliver the service/job that you placed a bid on within a given time frame and an adequate standard. Since your employer wants security from losses, they use a construction bond as a shield in the case you fail to deliver up to expectations and/or standards.
This is a type of job completion guarantee bond, which is commonly used within the construction industry. They can be referred to as various names, which will be listed below.
- Construction bond
- Contract bond
- Contractor bond
Virtually, these bonds are identical and share the same purpose. This type of bond basically ensures that the contract will be fulfilled. If one side of the arrangement fails to fulfill their duties, the other will be able to make a claim and attempt to recover their financial losses. Although these bonds are commonly used outside of the construction industry, contractors should be well familiar with them!
Let’s say you are in a bidding war and win the contract and now your employer has requested $1,000,000 dollar bond and $2,000,000 dollar contractor insurance in place prior to going into business. This is where we come in! Our bond specialists will analyze your business venture, negotiate with the contractor bonding company, and then provide you the bonds within a few hours.
Types of Bonds we provide:
- Construction Bid Bonds – Financial Security for Contract Bidding.
- Maintenance Bonds – Provides protection for a lengthier period of time.
- Performance Bonds – Guarantee of work being completed.
- Payment Bonds – Provides protection for payment workers.
- Subdivision Bonds – A bond used for subdivison development.
- Site Improvement Bonds – Making improvements to an existing project.
- Labour And Material Bonds – Helps cover Labour and Materials Cost.
- Surety’s Consent or Agreement to Bond – Agreement with the Bond Issuer.
- Bad Credit – Bonding for Businesses with poor credit.
- Fiduciary Bonds – Similar to Insurance (Protects your business)
2. Commercial Bonds – Governmental and local province regulations and statutes
3. License Bonds – Government bodies generally require you to obtain this type of bond.
4. Court Bonds – Used to satisfy legalities.
Do I need to look into getting a surety bond if I have Contractors Insurance?
Business owners often confuse insurance with bonds. Bonds are DIFFERENT from the contractors insurance. Bonding is a guarantee, NOT an insurance product. If your business was to get sued by a client for a slip and fall or for a liability insurance claim, your CGL (Commercial general liability insurance) policy would take effect and provide coverage. Bonds on the other hand provide NO COVERAGE for any liability lawsuits but rather act as a financial security in the event they need to be cashed to recover from losses when projects are not completed. If you want to learn more about specific surety products, you can click here to read about bonds offered by Chubb Limited that can benefit business owners like you.
3 Main Reasons Why You Need to Become Bonded
All over the country, there are millions of projects awaiting development. Some of these are currently accepting bids from contractors. If you work as a construction professional, you should take the time to get to know contractor bonds canada. As a construction contractor, you’ve likely heard the term “contract bond” or “construction bond” at some point or another. If you were unfamiliar with these phrases, you’re in trouble! Below, you will learn about these types of bonds and why you should purchase our bonds right away!
They’re Often Required
Contractors need to realize that they’ll never been able to succeed in the business, without utilizing our contractors bonds. This is the case, because almost all public projects require the contractor to obtain these bonds for construction, before they’ll even be able to place their bids! Some private projects may also require the contractor to back up their guarantee with some form of contract bond. Therefore, it is nearly impossible to make money in the construction business, without bonds!
We Offer Different Types
Before moving forward, you should realize that each individual project developer, especially in a competitive city like Toronto, will require you to secure a different type of bond, before you’ll be considered for their project. We offer all different types of bonds for your convenience, including bid bonds, performance bonds, payment bonds and contractor license bonds. By engaging in our services, you will quickly be able to discover what these bonds guarantee along with the type of bond that is needed for your business.
We are always here to help any company owners that are looking for bonds in Canada! Call us today and secure the type of bond you need right away, so your construction business can begin generating a steady income!
Protection from Start to Finish
If you are planning a large construction or development project, you should protect yourself from start to finish with the construction bond. This bond is designated to provide full protection from financial loss, if the project is not completed by the deadline or per the contract. While a bond from a Canadian surety company like ConstructionBond is normally issued for extremely large, expensive projects, they are also available for small to medium projects.
The Bond Company will draw up the contract, so it suits both the construction company (principal) and the customer. They will oversee the bond and if the customer is forced to file a complaint, which is done through the surety, an investigation will initiate. At the end of the investigation, a decision will be made either in favour of the customer or principal. The customer will be pain the full amount of the total contract amount, if the surety’s decision is in their favour. At this time, the surety will seek out the principal and expect to be paid in full.
How It Works
When it comes down to it, the principal or contractor is always responsible for obtaining the insurance bond, whether it is a bid/tender bond, performance bond or payment bond. Once the principal has determined that they need to obtain a security in the form of a bond, they’ll need to find a surety company and submit their application. After the surety company has examined and processed the application, they’ll provide the principal with a quote. The quote is for the premium, which is normally paid annually, by the principal. If the principal agrees to the amount in question, they’ll pay and will be provided with the bond and will receive the benefit of the surety company’s financial strength to help increase their surety credit.
Up Front and Annual Payment
Determining the annual premium, the surety will need to equate several factors, including credit rating, cash on hand, industry experience, reputation, and personal finances. Of course, if any negatives are found during the prequalification process, the rate will be much higher. The applicant, who is most often the contractor, will need to pay up front and this includes the sum of a year’s worth of coverage. If the contractor fails to make the lump sum payment, the contract will remain invalid. Another important thing to remember, the premium must be paid in a time efficient manner on an annual basis.
Works In Different Circumstances
It should be known that business bonds could work differently in a handful of different circumstances. There is an abundance of different types of bonds and they’re specifically designed to be beneficial in unique situations.
Qualifying for a Construction Bond in Canada?
Surety looks at what’s known as the three C’s of Credit
- Capital: Do you as the contractor have the net worth or are worth enough to complete the project you require a bond for?
- Capacity: Do you have as the contractor have enough financial and human strength to complete the project – Even in the case of delays or unexpected circumstances.
- Character: Does your past and previous work reflect the potential outcome of your new project? Who can vouch for you or your work!
Ready to Apply for a Contractors Bond?
If you’re a construction contractor, you shouldn’t make a move until you check out our services. We offer all of the contractors bonds needed to help you begin making a profit and satisfying the needs of your clients! Be sure to speak to a ConstructionBond specialist out immediately! You will be glad that you did!
We are an independent Surety Company, with offices all across Canada to meet the specialized needs of our clients. We believe that our clients not only deserve the cheapest rates, but the most professional and courteous service. Being in the bonds for contractors market for multiple years, we have built tremendous relationships with a massive network of Bonding insurance companies that not only allows us to get the cheapest rates on the market, but also at the fastest turn around times! This allows to place the contractorsbond that you need within the time frame that you want the bond in! Our bonding programs are unwritten by insurance companies that are licensed in Canada and compliant with the CCDC Standards.
Get in touch with one of our bond experts if you are looking to get a construction bond! If need be, we custom tailor the terms of each bond to fit to the client requirements. Our in-house infrastructure allows us to provide construction bonds at the fastest speeds along with the most competitive prices. Go here to read more on Contractor bonds from the government of Canada. Give us a call today at 1-888-480-7677 or email us for your contractor surety bond Canada (Contractors bonds).