A Comprehensive Guide – What Exactly Are Surety Bonds In Canada.

Many Canadian citizens understand very little about surety bonds. 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 a surety bond in the future. Although they’re incredibly helpful for construction contractors and subcontractors, these aren’t the only entities that may need to invest in surety bonds at some point in the future. Within this guide, you’ll learn all about surety bonds in Canada, so you’ll be better prepared, if you are ever required to obtain a surety bond.

Basics

Before moving any further, you should take the time to familiarize yourself with the definition and basics of surety bonds. This is nothing more than an agreement between two individualistic parties. In a surety, 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.

Three-Party Involvement

Surety 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 bond 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

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 bond 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.

Principal

In order to understand precisely how the surety bond 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 surety bond to guarantee that they’d complete the project as specified within the contractor.

The Surety

In Canada, the surety is the entity, which has assigned the surety 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.

How It Works

When it comes down to it, the principal or contractor is always responsible for obtaining the surety bond, whether it is a bid/tender bond, performance bond or payment bond. Once the principal has determined that they need a surety 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

Although the aforementioned information is fairly general, it should be known that surety 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. Below, you will find a quick breakdown of some of the most common surety bonds and their purposes.

Commercial Surety Bonding – This is truly a massive category and composes of a variety of different industries. Within the commercial surety bonds, you will find roofer bonds, health club bonds and pool contractor bonds. An auto dealer surety bond would also fall within this category. This is a license and permit surety bond, which is required, for those that wish to sell automobiles.

Contract Surety BondsContract bonds are generally utilized within the construction industry and help to ensure that a developer or contractor will complete the project, while abiding by the guidelines setout in the initial contract.

Within the contract-bonding category, contractors and project owners commonly take advantage of a handful of different bonds, including bid, payment, performance, and even supply bonds. Each covers something unique, but they all work in a similar manner and help to provide the obligee with peace of mind, while holding the principal to the original agreement.

Conclusion

If you are a newbie to the contractor business world, it is crucial that you take the time to read up on this topic. Your finances, family, and reputation depend on your obligated fulfillment of each development project that you are involved in. Of course, you can never be prepared for everything, but one way to start is with speaking to a ConstructionBond bond broker for all your construction bond needs in Canada.