A labour and material bond guide for the Canadian business owner

For those employed in the construction industry, it can make a huge difference to have a Labour and Material Bond. The reason for this is that it works as a guarantee for both workers and suppliers that they will get paid. In fact, in quite a few cases, owners expect general contractors to post such a bond for convenience. For sub-contractors and suppliers this means they can rest easy knowing they will be paid. For owners this provides the guarantee that the general contractor will have access to the appropriate funds to pay the bonded parties. While also used in the private sphere, these bonds are much more common in the public sector.

What is a Labour and Material Bond?

These bonds are insurance of a kind and their purpose is to guarantee that all personnel who contribute to a construction project, either as sub-contractors or as suppliers are paid for their services. In the case of suppliers, they are paid for the materials they have provided.  These bonds are provided by surety bond companies.

Under the labour and material bond, a claimant is someone who has a direct contract with the bonded contractor and is to provide the relevant goods or services to the bonded job. These claimants are usually trade contractors or suppliers. However, it is of note that sub-contractors and suppliers that belong in lower tiers do not get any coverage under these bonds.

Additionally, a labour and material bond has to be executed at the same time as a performance bond; this is because the two of them are companion documents. Worth mentioning is also that performance bonds are distinct from labour and material bonds. Some believe they are interchangeable in terms of their purpose but both cover different aspects of the process. As described above and below, the two are in fact separate bonds and work within different capacities.

A performance bond itself works as a guarantee to ensure that all obligations are fulfilled by the bonded contractor, in line with the terms and conditions stated within the contract. In the case of both performance bonds as well as labour and material bonds, owners will typically ask for 50 percent of the contract; though it is also possible for the amount to be 100 percent. Keep in mind that the surety is only responsible for the exact amount of the bond, it won’t be liable for a higher amount.

Role of the General Contractor

The general contractor operates within the capacity of the principal on the bond. They do so for the sake of providing convenience to the owner. The said owner will receive the original bond through the general contractor prior to the project beginning.

Role of the Sub-Contractor/Supplier

As mentioned above, the suppliers and sub-contractors are within the capacity of claimants. As such these parties don’t actually receive any copies of the labour and material bond. However due to the Ontario Construction Lien Act, Section 39, they can receive copies of the bond upon request. This particular section of this Act affords citizens with a right to information and requesting a copy of the labour and material bond is covered under it.

The best time to actually request this copy is right when the project is beginning. It is advisable to look over the bond and make note of the surety as well as any deadlines related to issuing claims. Additionally, you will also be able to figure out how you are supposed to give notice of your claim and who will be receiving it. Also note that the bond itself is a necessary document when making a claim.

If you receive all your payments in a punctual fashion, you will no longer need the bond. However, if the payments start to become more irregular, then you should consult the bond. It’s also recommended that you make preparations for sending out the necessary notices for your claim. In the event this poses a challenge for you and you lack the information to proceed, then consider reaching out to your surety bond broker for guidance.

Advantages of Labour and Material Bonds

By making use of these bonds you will find that both owners and the bonded party (be it a sub-contractor or a supplier) can see a project through to completion with complete guarantee that money will be directed where it needs to go. This serves to provide an incentive to the workers who would otherwise find it hard to commit themselves to work without pay. Being reassured of their money can also provide motivation to work harder/smarter.

These bonds are also helpful in the event that a major project is bogged down by a default. With a bond in place, the surety can step in and still make sure that the relevant parties get paid by providing the necessary funds. However in the absence of a bond, owners typically have to deal with a lot of phone calls from distressed contractors and suppliers who want to be compensated for the materials and services that were already provided. And so, having a bond in place guarantees happier workers and ends up reducing stress for owners in this manner.

Worth noting is that most jurisdictions in Canada require the owners to keep 10 percent from each draw to function as a reserve. This money is meant to be against liens that have been posted by traders and suppliers. In the event that a general contractor has created a long string of unpaid bills and liens, the owner is required to step in and pay the valid lien claimants money from the reserve. With the presence of a labour and material bond, owners can maintain a regular cash-flow as the money would then be covered and lien problems will be alleviated a great deal.

When owners use these bonds, you essentially have an alternative course of action from filing liens. Though as a claimant, you can still pursue payment under both a lien and a bond. Hence, a bond might not completely eliminate liens but it can greatly reduce the number of which might spring up.

It is also fair to mention that owners are often morally and legally obligated to provide full payment to any and all trades which have worked on their project. In some cases there can also be a political obligation or motivation; however this is only when projects related to the public sector are involved. Remember that the owner receives no personal benefit from the bond as they don’t qualify as a claimant hence they need to consider the use of a material and labour bond for the sake of the aforementioned obligations.

Other Helpful Information

The nature of claims is such that they are time sensitive. When you make your claim, keep in mind that you have to issue it within a certain specific time frame. You have three options in this regard,

  • Before 120 days have passed since your last invoice.
  • Within 120 days of the services that you provided to the construction project.
  • Prior to 120 days passing since the last date you were present on site.

However before you make your claim you also need to make sure you have sent out your notice of claim. The latter of which is a document that details the relevant information required for the claim. This includes: project details, the various involved parties, the amount itself which is being claimed, along with all the documents which will be included along with the claim submission. Also present in the documentation should be the dates during which you provided your services to the project. This should be as clear as possible so that the receiving parties can easily look over the information.

Additionally the notice of claim is to be sent in a specific manner and to three specific parties. The method through which it’s sent is registered mail; while the parties that will receive it are the bond company, the general contractor as well as the owner.

For the sake of the claim it is of utmost important that you can provide the necessary records which document the needed details. When sending out your notice of claim, you need to remember to remember to provide the following:

  • Make copies of every invoice
  • A copy of the written contract
  • The exact amount being claimed which includes the HST
  • Proof of payment which has been received
  • The copy of the material and labour bond

References