Surety bonds in Quebec | AccesDirect

A surety bond is a financial guarantee issued by an insurer or financial institution that guarantees a contractor will fulfill their contractual obligations. If the contractor defaults, the surety indemnifies the obligee (the owner) up to the guaranteed amount. Unlike insurance, the surety can require reimbursement from the contractor in the event of a claim.

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

Contractors bidding on public contracts (government, municipalities, public bodies) above certain thresholds are generally required to provide a surety bond. The Act respecting contracts of public bodies and various municipal regulations set out these requirements. In the private sector, owners can also require it contractually.

The CCQ provides protections for subcontractors and suppliers through legal construction hypothecs. It does not make surety bonds mandatory as such, but the Building Act and municipal regulations complete this framework. For public works, the Act respecting contracts of public bodies sets out more specific requirements based on contract value.

The premium for a surety bond generally ranges from 0.5% to 3% of the guaranteed value, depending on the contractor’s financial profile and the type of contract. A contractor with strong financial statements and a good track record will pay less. For a $500,000 bid bond, the premium can range from $2,500 to $7,500. It is a deductible operating expense.

For routine surety bonds with a complete financial file, the timeframe is generally 24 to 72 hours. For new clients or larger projects, the review can take 5 to 10 business days. It is advisable to set up your surety bond program before you face urgent deadlines — an established relationship with a surety insurer significantly speeds up the process.

If the contractor defaults, the obligee notifies the surety in writing, documenting the breach. The surety investigates, often attempts to negotiate a settlement, and, if the default is confirmed, indemnifies the obligee up to the guaranteed limit. The surety insurer then seeks reimbursement from the contractor for the amounts paid — this is a fundamental difference from traditional insurance.

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

These are two complementary but distinct instruments. A surety bond guarantees the performance of your contractual obligations toward an owner. Liability insurance covers property damage or bodily injury caused to third parties during the work. A contractor working on public or major contracts needs both. One does not replace the other.

Some contracts require subcontractors above a certain level to provide their own surety bond. The general contractor may also require it as a subcontract condition to protect against the default of a key subcontractor. If your subcontractor defaults and is not bonded, the additional costs to replace them are generally your responsibility.