A bond is a financial guarantee issued by an insurer or financial institution that guarantees a contractor will fulfil their contractual obligations. If the contractor defaults, the surety compensates the beneficiary (the project owner) up to the guaranteed amount. Unlike insurance, the surety can demand repayment from the contractor in case of a claim.

The four main types are: bid bond (guarantees the contractor will honour their offer), performance bond (guarantees proper completion of work), release of retention bond (releases guarantee retentions), and payment bond (guarantees payment to subcontractors and suppliers). Each applies at a different stage of the project.

Contractors bidding on public contracts (government, municipalities, public agencies) above certain thresholds are generally required to provide a bond. The Public Contracts Act and various municipal regulations specify these requirements. In the private sector, project owners can also contractually require bonds.

The CCQ provides protections for subcontractors and suppliers through legal construction mortgages. It does not make bonding mandatory as such, but the Building Act and municipal regulations supplement this framework. For public works, the Public Contracts Act provides more specific requirements based on contract value.

A bond premium typically ranges from 0.5% to 3% of the guaranteed amount, depending on the contractor’s financial profile and contract type. A contractor with strong financial statements and good history will pay less. For a $500,000 bid bond, the premium might range from $2,500 to $7,500. This is a tax-deductible operating expense.

For routine bonds with complete financial documentation, the timeframe is typically 24 to 72 hours. For new clients or larger projects, analysis may take 5 to 10 business days. It’s advisable to establish your bonding program before urgent deadlines — an established relationship with a surety significantly accelerates the process.

If the contractor defaults, the beneficiary notifies the surety in writing by documenting the breach. The surety investigates, often attempts settlement, and if the default is confirmed, compensates the beneficiary up to the guaranteed limit. The surety then pursues the contractor to recover the amounts paid — a fundamental difference from traditional insurance.

This depends on the bond type. Bid bonds are typically issued for the duration of the bidding process. Performance bonds cover the contract duration and may include a warranty period after completion. Your broker will guide you on specific requirements for each contract.

These are two complementary but distinct instruments. A bond guarantees you’ll fulfil your contractual obligations to a project owner. Liability insurance covers physical or bodily damage caused to third parties during work. A contractor working on public or major contracts needs both. One does not replace the other.

Some contracts require subcontractors at a certain level to provide their own bond. The general contractor can also require it as a subcontracting condition to protect against a key subcontractor’s failure. If your subcontractor defaults and is not bonded, replacement costs are generally your responsibility.