Surety bonds explained in simple words
A surety bond in the simplest words is a financial guarantee that your project owner (the party hiring you/awarding you the job) will require. The purpose of this bond is very specific. If your company defaults (does not complete) a job OR does not meet an expected level of standard when it comes to time and quality with the construction project, the bond may be cashed to recover from loses that your project owner incurs. The project owner or the party requiring this surety bond uses it as a financial guarantee to secure themselves from loses in event the party making the promise (You) does not deliver or finish a job on the agreed contract terms.
There are 3 parties in a standard bonding agreement
- Obligee – Party that requires the bond.
- Principal – The party that does the job which is YOU & the owners of the company.
- Surety – The insurance company or surety company that provides the bond.
You must keep in mind that there are many different types of surety products that are applicable for their respective industries. Below you will find detailed information about surety bonds for construction companies.
Do you have a job coming up that you would like to bid on OR Require a Surety Facility setup in advance? You have come to the right place!
Need a Surety Bond? – Here is how we can help!
We are a Canandian business that connects contractors and other businesses with surety bonding brokerages and insurance companies. ConstructionBond.ca deals with Insurance and Surety Companies that have offices all across Canada to meet the specialized needs of our clients.
We believe that our clients not only deserve the best rates, but the most professional and courteous service. Being in the Contractor Bonds (Construction bonds) also known as surety bond market for multiple years, we have built tremendous relationships with a massive network of Bonding insurance companies that not only allows us to get cheap rates, but also 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 and Surety companies that are licensed in Canada and compliant with the CCDC Standards.
How do Surety Bonds “Work”?
These bonds work similar to insurance but are completely different when it comes to a claim payout. The principal (YOU) provides a bond to the obligee (person hiring you) to guarantee them that a specific construction or builder job will be completed successfully. The way you (principal) do that is by providing a bond for ‘x’ amount of dollars to the obligee for a mutually set and agreed terms. The terms are determined by the principal, obligee, and the surety regarding the job.
In an agreement where a surety bond exists, the obligee is considered the beneficiary. If you as a company fail to complete a job successfully, the project owner which is the obligee may claim from the bond itself to recover from their losses.
So you may wonder, why would the surety company take such a huge risk for a small premium when its possible for a company to default if something does go wrong?
The surety makes the principal, which is you and the owners of the company, sign an indemnity agreement also known as general agreement of indemnity. This agreement contractually pledges the company being bonded, its assets, and the owners personals assets to reimburse the Surety in the event a default does occur and the surety has to pay out. So if you default, the surety will pay, and if they pay, they will recover their payout amount from the company they bonded plus any legal costs that accumulate along the way.
With certain high risk bonds or situations (companies with bad credit or no assets) where the surety can not recoup the money from the obligee, they ultimately absorb the loss. This is the reason why there is thorough underwriting that occurs before bonds are issued. Surety claims are huge and in this world, no body wants to lose money.
Quick breakdown of a standard construction surety bond program
For you to even begin using surety bonds for your business, you will first need to setup a surety facility with an insurance company or a surety company.
You may be wondering what a Surety facility is… Setting up a surety facility basically means your broker arranging an insurance company or surety company to back you for all future projects that will require any sort of surety bonds. Keep in mind, when we say future projects, we are talking about projects that fall into the limits you get approved for. Below you will find information about our programs and the limits you will most likely start off with.
Now that you know what a surety facility is, below you will read about the total cost you will have to pay to setup a surety facility, the limits of the facility you will get for that cost, and what will be required from you to get started.
Ball park cost for the year – To read a detailed guide about cost, visit this page.
- Surety Facility Fees – $500
- Surety Facility Premium – $2,000
Limits you will qualify for to start:
- $500,000 limit per job
- $1 million aggregate for the year
Per job limit means how big one job can be and aggregate means total $ amount of jobs you can have on going at one time.
*Keep in mind these limits can be increased based on your requirements.*
# of bonds for you can get for the year
- UNLIMITED – We charge $0 FEES for bid bonds and performance bonds.
What’s required from you
To start, we will need to get our application completed which will basically give us a clear picture of your company, its operations, your revenues, type of jobs you have done, current contracts, employees, and how well the business is capitalized. To make it easy, here is a quick list of items we will need.
- Our completed application
- In house financials of the company for the last year. Notice to reader or review engagement will do. If you do not have those available, we can work around it.
- Work on hand report
- Owner(s) net worth questionnaire (Application provided by us)
Do not get discouraged. All these items take less than 24 hours to complete if you are dedicated. On top of that, our brokers are by your side to guide you through the whole process. We are always a call away.
In Canada, more than 50% of new businesses DO NOT qualify for surety facility with standard markets. All insurance and surety companies have very strict underwriting rules. To read a detailed guide of whats required from you, click here.
To improve your chances of landing a facility, we negotiate terms with our markets and start you off with low limits to build trust in the event you are a new company or just simply do not qualify for the regular program.
If you want to increase your chances with any broker, make sure your financials are up to date, your company is well capitalized, and have a good track record to show of jobs you have completed in the past.
FAQ Regarding Surety Bonds
- Why do businesses need these bonds?
- Who requires these bonds?
- What to look for in a broker?
- How does my credit have an impact?
- How fast can I get bonded?
- What do these bonds cover?
Alternatives to using a Surety Bond
There are 2 ways you can go if you do not want to go the surety route. The first being a Letter of credit (LOC) from the bank, and the second being putting up your own capital and assets with the obligee.
The quickest and easiest alternative to using a surety bond is providing your project owner (Obligee) a letter of credit from the bank. Your banking institution in the simplest words underwrites and provides the obligee (project owner) their own guarantee on your behalf . To do this they do a closes financial analysis of your company, the job coming up that you require the LOC (Letter of credit) for, the risks involved with the job, and the expected outcome of the project before they issue this document. A LOC works the same way as a surety bond, but there are many downsides of using this alternative such as:
- Some Obligees just simply do not accept a LOC. Therefore you get disqualified if you can not produce a bond
- You post your company’s assets as collateral with the bank to secure this guarantee from them. Not only does this restrict you to apply for loans and credit lines, but also limits you from approaching private lenders who may be able to offer more money and interest rates than the bank.
The second option is posting up your own cash with the obligee. This option works if you have a significant amount of cash available and have no issues coming up with more if need be. However, this option is definitely the least attractive as there are even more downsides of using your own cash than using a LOC. To list a few:
- Makes your company less liquid and restricted to raising capital that may be absolutely necessary to finish a job. Not having sufficient amount of cash at hand could be the fine line between the completion of a job and a default.
- You have to put your own personal assets or cash collateral to have this guarantee. This makes you personally liable in the event something goes sour. The last thing you want is your house being at stake because of a defaulted job.
- It’s NEVER a good idea to give the obligee rights and authority to use your posted cash to indemnify themselves at their own discretion. What this basically means is let’s say your project owner ‘thinks’ you have done something wrong or not up to their standard. Based on what their judgement, they can start making small claims from your posted cash. In these situations, false claims become an issue as there is nothing stopping the obligee from making claims they deem necessary.
- It ends up costing you more to use this option as you lose potentially interest revenue on that same money. Putting in perspective, the interest earned in most cases is greater than the cost of the bond itself.
There is a reason why surety bonds exist. It’s always a better option to use these bonds if you can qualify for them. Saying that, if today you do not qualify, that does not mean the future will be the same. Focus on making your business more capitalized and have a good track record of completed jobs so you become undeniable in front of the Surety’s eyes the next time you apply for a surety bond.
Surety vs Insurance
Do not confused having commercial general liability insurance with surety bonding. CGL provides liability insurance coverage in the event a claim comes as a result of company’s day to day operations while on the other hand the surety provides NO PROTECTION in those situations but rather acts a party providing a financial guarantee to the obligee (who requires the bond).
If you are ever sued by a client because of your work, your CGL policy will protect you, NOT your surety company.
What are Construction Bonds & Contractor Bonds?
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 bond as a shield in the case you fail to deliver up to expectations and/or standards.
A contractor bond is a type of 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/surety, and then provide you the bonds within a few hours.
Get a FREE & NO OBLIGATION Quote for your Contractors Bond today!
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.
- Labour And Material Bonds – Helps cover Labour and Materials Cost.
- Surety’s Consent or Agreement to Bond – Agreement with the Bond Issuer.
- Fiduciary Bonds – Similar to Insurance (Protects your business)
- License Bonds – Government bodies generally require you to obtain this type of bond.
Why You Need Our Affordable Bonds
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, read about what they are by clicking here! 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 bonding.
We Offer Different Types
Before moving forward, you should realize that each individual project developer 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 the bonds that are needed and secure them 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 bond company is normally issued for extremely large, expensive projects, they are also available for small to medium projects.
The surety or 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.
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 Surety Bond? Here are the steps!
- Get connected with a Surety Broker – Click here
- Discuss your bonding Needs & Apply for a Surety Facility (Our partner brokers make this easy, have no worries!)
- Compare Rates
- Sign your Surety agreement with the Insurance or surety Company.
- Sit back and wait for your bonds to arrive.
Our clients and customers are our priority. We want you provide you an experience that you desire, when expecting to speak to a Canadian Surety Brokerage. If you’re a construction contractor, you shouldn’t make a move until you check out our services. Our providers offer all of the contractors bonds needed to help you begin making a profit and satisfying the needs of your clients! Be sure to check us out immediately! You will be glad that you did!
Get in touch with one of our bond experts! If need be, they can custom tailor the terms of each bond to fit to the client requirements. Our in-house infrastructure allows us to connect you to a broker that can provide construction bonds at the fastest speeds along with the most competitive prices. Go here to read more on Surety 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 needs.