A Brief Guide on Performance Bonds in the Canadian Construction Industry

As different Canadian provinces modified their Construction Acts during the last few years, the necessity for performance bonds has increased dramatically. The Ontario government passed Bill 142 in December 2017, revising the Construction Lien Act, which was first enacted in 1983. Performance bonds Canada are now required on all publicly financed construction projects worth more than $500,000 under this legislation. This legislation has also shown impacts in the private sector, with several consultancies in Canada including bid bond requirements in their contract specifications.

Performance bonds rose in popularity only after 2017. Hence, it is still a new concept in the surety industry. Naturally, a few common doubts and questions frequently crop up in people’s minds. This post will address a few of these frequently asked questions about performance bonds.

What is the Process for Obtaining a Performance Bond?

In Canada, a  contractor must first meet the criteria for a bond facility before obtaining a performance bond. A list of documents detailing a firm’s experience and financial standing must be presented to the bond provider for them to verify a contractor’s capacity to fulfill the task covered by the performance bond.

The bond provider’s list of documents includes the contractor’s recent CPA-prepared year-end income statements, net worth declaration, a contractor’s questionnaire, management structure, and the current project’s schedule.

What is the Price of a Performance Bond?

Several factors determine the price of a performance bond.

  • The first factor to consider is the percent performance bond sought by the owner, which is usually 10%, 50%, or 100% of the contract sum. The rate is higher when the percentage is higher.
  • The firm’s financial statement stability is the second element to consider. A corporation with good financials is seen as a smaller risk and hence fetches a lower interest rate.
  • The third is determined by the annual amount of bond premium generated. If you generate more bond premiums, your rates will often be lower.

Bond rates are divided into four categories: preferred rates, semi-preferred rates, standard rates, and non-standard rates, with non-standard rates being the most expensive.

Is it Obligatory to Obtain a Performance Bond?

In most cases, project owners will outline their security requisites in the contract or tender documents. If a performance bond is required upon contract award, it is a statutory requirement to be met.

In Canada, if a contractor cannot produce a performance bond before the contract is awarded, the owner will grant the contract to the next lowest conforming bidder. It’s worth noting that projects that demand a performance bond nearly always necessitate a bid bond during the tendering process.

Do You Need a Performance Bond Broker?

A contractor who requires performance bonds in Canada will most often need a broker to help with the entire process.

Due to the complicated structure of the bonding procedure, a surety broker will be needed to assist the contractor in becoming educated and assembling the dossier of documents required for bond application and submitting it to the bond provider. With so many marketplaces offering surety bonds, having a broker might be the difference between getting the bonding limits you need at market rates.

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