Surety bonds which are also known as contractor bonds is a legal guarantee which is issued by an insurance company which is the “surety”. It provides financial protection to the person or party who is hiring them and is known as the “Obligee”. It is used in case the contractor or the principal is unable or defaults on his job and does not complete it on time, or fail to deliver the standard or quality which was mutually agreed upon before the construction contract started. Surety bonds are used worldwide including Canada. Most people are unaware of what exactly they are even though they are extremely helpful for the construction contractors and for the subcontractors. In fact, these bonds can also be quite helpful in various other types of businesses and projects as well! So if you are a construction company in Canada, the good news is that you can easily apply for a Surety bond directly over the internet now!
Why do the Canadian contractors need a Surety bond
The business owners and the Canadian contractors are strictly regulated by a wide range of laws and as such all business owners must become familiar with the surety bond. They should know how it works, how to apply for it and what costs are involved in the process since it is an essential part of doing business in Canada.
They are required
The contractors would not be able to succeed in their business without using the contractor bonds. In fact, all of the public projects require the contractors to obtain these bonds for the purpose of construction even before they can place their bids. There are many private projects as well, where the contractors are expected to back up with guarantee with some form of a contract bond. As such, it is nearly impossible in Canada to be in the construction business without having a bond of some sort!
Provides protection from start to finish
If you are involved in a large development or construction project, you need protection from the start of your job till its completion. Having a construction bond or Surety bond can provide you full protection against financial loss if the project is not completed by the deadline or as per schedule.
Helps you to stay out of court
Being a construction contractor, you probably know how important it is for you to stay out of court. In this business, it is very common for a client to file a lawsuit against your company and it is quite possible for that law suit to be dragged on for years, compounding the costs in the process as well. The best way is to solve all your problems outside the court and that is where the Surety bond would help you the most. The surety insurer would be the person who would help you out in this case, being the mediator between the contractor and the client. When you are working directly with the surety company, then it is possible to solve the issue without taking it to court.
Leveraging the bond
Being a contractor, you probably do not even have a lot of cash flow in hand and may not even have the total amount which is needed to use the services of the Surety issuer. The Surety issuer company in this case may be able to provide you with leverage so that without using your own money, you are able to obtain the bond. You will however be required to pay a small percentage of the total amount and the rest would be covered by the surety issuer. As long as the project is finished without any problems and on time, there will be hardly any risks involved.
It is better than a letter of credit
Even though many contractors prefer a letter of credit over a Surety bond, it is no doubt true that there are many benefits which are associated with the Surety bond. A Surety bond does not require collateral and is more comprehensive than a letter of credit. There are many aspects which the Surety bond covers but is neglected by the letter of credit. This is why the Surety bond is the best choice for contractors as compared to the letter the credit.
It reinforces industry regulations
Since the Surety bond is a requirement by the Canadian government, it is included in the licensing process. This means that, all the general contractors are required by the territories and the provinces throughout Canada to have a contractor licensing bond. Through this contract, it acts as a guarantee for your job performance for a specific project and reinforces the regulations of the industry.
Surety bonds versus Insurance
Many business owners get confused between bonds and insurance. Contractors insurance is different from bonds. Bonds provide a guarantee and not insurance. So for example, if your business is sued by a client for a fall or a slip for a liability insurance claim, your insurance policy would provide coverage. Bonds on the other hand, would provide you with absolutely no coverage for any liability lawsuits. They are more of a financial security in case it has to be cashed to recover from losses when the projects are not completed on time.
Types of Surety Bonds
The Surety bonds which are used in construction are known as the contract Surety bonds which are of three types.
- Bid bonds
- Performance bonds
- Payment bonds
Who requires these bonds?
These surety bonds come in handy for the public as well as for the private sector in order to minimize their risks.
The public sector – as per Statutory Requirement
- The Federal Government, as it helps to protect the tax payers money and it assures that the lowest bidder is also capable of completing the project on time and as per requirement
- State and Local Government, through which it provides the necessary payment protection for the suppliers and for the subcontractors
The Private sector
- The Private Owners, the surety bond helps assure that the contractors are qualified with expertise, assistance and experience and in case of failure, the surety would be able to handle the project completion
- Lending Institutions, the surety assures that the projects would be built as per the terms and the conditions of the contract and the lender can also have direct rights over the bond, being a dual obligee
- General contractors, they can require these bonds from their sub contractors
How to qualify for a surety bond
Most of the surety bond providers usually look at the three C’s of credit of a company, which are:
- Capital: Whether the contractor has the required net worth or is worth enough for the project for which they require a bond for.
- Capacity: Does the contractor have enough human strength or financial capability in order to complete their project, especially in case of unexpected circumstances or delays.
- Character: Looking at the past experience of the contracting company, does their previous work reflect the outcome of the potential new project or not. Most of the times, the previous work can vouch for the contractor!
Having a surety bond ensures that the project will be finished on time and on the terms of the contract. In case the contractor faces any cash flow problems, the surety can help the contractor or if the contractor abandons the project, the surety can help by providing a replacement for the contractor. Most of the surety companies are divisions of insurance companies and both the insurance companies and the surety bonds are regulated by the state insurance departments. However, the insurance related products and policies are to compensate for the adverse or unforeseen events while the surety bonds are a guarantee for the contractual obligations of the contractor. The surety is able to prequalify the contractor based on their financial strength and the construction experience or expertise.
So if you are a contractor in Canada then you must get hold of a surety bond before your next project or get information regarding how it works if you are just starting out your business. You can get quotes from various companies and many have offices in Ontario as well as all over Canada. In fact many of the surety companies give the quotes online and have their bonding programs unwritten by famous insurance companies which are also licensed in Canada and are also compliant with the CCDC standards.