What are surety or performance bonds?
Surety bonds are centered around construction risk, which includes the risk of contractor failure. This is of particular concern due to the COVID-19 pandemic. Government subsidies and infrastructure spending are mitigating that risk to some extent, but those programs are not going to continue forever. Contractors are working through their pre-pandemic backlogs while dealing with increased labour and materials costs. According to Steve Ness, President of the Surety Association of Canada (SAC), “The industry is better at managing risk than ever before, we’re far more sophisticated technically, but the challenges we’re facing now are unprecedented.”
Why do contractors fail?
- Technical inability to complete
- Unqualified contractors, the lowest “irresponsible” bidder
- Unpaid subcontractors and suppliers causing liens
- Warranty problems
To protect against construction risk, you can use surety bonds, including performance bonds, and labour & material payment bonds.
What are surety bonds?
Surety is not insurance. Surety does not anticipate losses; in fact, if there appears to be any risk that the contractor will fail, that surety will not be issued. It is a third-party agreement between the contractor, the surety, and the buying agency, with the guarantee provided by the surety.
Surety bonds provide:
- Pre-qualification: Assurance that the bonded contractor is qualified for that job
- Ongoing monitoring: Sureties monitor bonded contractors regularly to prevent loss and mediate if necessary
- Security: Financial protection in the event of a default
Unbonded contractors are 10 times more likely to fail than a bonded counterpart.
A performance bond guarantees the contractor will perform the obligations under the contract in accordance with the terms and conditions. In order to claim under the performance bond, the contractor must be in a declared default, and the owner must have performed all their obligations under the contract.
Under a performance bond, the buyer agency has four options:
- Remedy the default
- Complete the contract
- Arrange for a new contractor to complete the contract
- Tender payment
Labour & material payment bonds
A labour & material payment bond guarantees that the contractor will pay all documented claims from direct subcontractors and suppliers for materials and services for the bonded project.
What is an e-bond?
An e-bond is an electronic file with embedded digital certification creating a secure electronic document with a uniquely identifiable fingerprint.
An e-bond must have:
- Integrity of content
- Digital signatures
- Digital seal
- Acknowledgment of intent
A true e-bond is not just a scanned copy of a paper bond. Seals and signatures must be created electronically within the e-bond to be verifiable.
The bids&tenders system is equipped with the capability for suppliers to upload their e-bond within their bid submission; suppliers will receive an error message if they attempt to upload a scanned copy of a bond instead. Buyer organizations have the option to only accept e-bonds from their suppliers.
An introduction to surety bonds
Want to learn more about surety bonds, e-bonds, and the protection they provide? Watch the recording of the Digital Speaker Series session, “An introduction to surety bonds,” with Steve Ness and Sharon Clark-Koufis from the Surety Association of Canada.