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CONTRACT SURETY BONDS DEFINED
A bond is a document issued by a surety company on behalf of a contractor (or supplier or service provider), guaranteeing that contractor will complete a contract per the specifications (contract). A bond guarantees a specific contract and thus the dates and descriptions on both documents must match.

WHO BENEFITS FROM A CONTRACT SURETY BOND?
Your client is referred to as the OBLIGEE in a bond. Your company is referred to as the PRINCIPAL. If your company fails to perform, the surety company steps in and makes good on your obligations and your company (and it's shareholders personally) are obligated to repay the bonding company for losses they have paid out in claims and expenses. It is the Obligee who benefits from most bonds but it is your subs and suppliers who benefit from a Labour and Material Payment Bond (more on that later)

TYPES OF BONDS
This tutorial is only addressing contract surety bonds predominently used in the construction industry but there is another category of bond called Commercial Bonds. These are typically in support of a license or permit or required by a government agency to facilitate tax issues.

WHY ARE BONDS USED?
Publicly Funded Projects
Most municipal, provincial and federal government bodies require contractors and service providers to post bonds to protect taxpayers' funds under to fund that project.
Subtrade Bonding
General Contractors benefit from bonding their subtrades both from the prequalification aspect and by the security on the contracts themselves by avoiding the financial impact of that subtrade failing to complete the contract.

ADVANTAGES TO THE USE OF SURETY BONDS

• Ability to provide bonds opens up job opportunities for your company
• Levels playing field by ensuring only qualified contractors are bidding
• If there is a dispute on a job, the Obligee can simply cash your letter of credit whereas with a bond there is a process and investigation wherein the Obligee must prove his case before they can access any funds. Your company has a chance to defend yourself first.
• The letter of credit is almost always more expensive and often it is provided in an amount in excess of the contract price and remains in effect until substantial completion and sometimes beyond.
• A Labour and Material Payment Bond gives comfort to suppliers and subcontractors which can result in better terms for you. They have no protection under a letter of credit

HOW ARE BONDS DIFFERENT FROM INSURANCE?

• An insurance policy assumes that there will be a loss, so the premium for an insurance policy is calculated to cover losses that may occur. A bond, on the other hand, is an extension of credit with the assumption there will be no loss. The bond premium covers only the underwriting expenses of the surety company.
• There are 2 parties to an insurance contract – the insured and the insurer. In a surety bond there are three parties. If there is a claim the principal (your company) will have to repay whatever loss the surety company experiences.
• Personal indemnities of shareholders and their spouses are also required and would be called upon in a loss situation. This means you are risking your house and your car and everything else you own

3 STAGES OF CONSTRUCTION

1. PREQUALIFICATION STAGE
Often contractors are required to submit a prequalification package prior to a job being let for tender which may include a letter from their bonding company. At this stage there is no spec available to underwrite so the bonding company cannot commit to bonding.
You may also be required to provide your company’s bonding limits. Surety facilities don’t have limits – just guidelines but there is a lot of misinformation about surety bonds within the architectural and municipal industries. Depending on the your workload at the time this project progresses to Tender Stage it may or may not fit within those guidelines.
The letter provided would typically be worded as follows:
It is our understanding that «principal» wishes to be prequalified as a tenderer on the above captioned project, which we understand has an estimated contract value of $«estimate». We are the Surety Company for____________, a highly valued client of ______________. Should______________ be successful in their submission, any request by our client for the requisite bonding support will be given our full consideration at such time. Our decision to extend the required suretyship will be subject to our normal underwriting requirements

2. TENDER STAGE - There are 2 contract surety bonds which could potentially be required at this stage

Agreement to Bond - also referred to as a Consent of Surety

• A guarantee by the surety that it will provide thePerformance and/or Labour and Material Payment Bond if “the principal” is the successful bidder.
• There is no standard wording and the document doesnot exist in the USA and has never been to court in Canada
• Many owners have developed their own forms. If those forms are not used you will likely be disqualified. Make sure you submit that form out of the spec along with the bond request.
• This document must have an original signature and company seal for the surety company so make sure you keep this in mind and allows plenty of time.

• A guarantee from the Surety (bonding company) to the Obligee, the good faith of the Principal (you) when tendering
• If you fail to enter into a formal contract after the bid has been accepted, you are obliged to pay the Obligee either a fixed amount or the difference in money between your tender and the contract price the Obligee eventually enters into with someone else.
• In other words – if you make a mistake in your tender and don’t want to take the job after all; the bonding company will have to pay the obligee the difference between your price and the price of the next qualified tender. Remember that with bonds; you will be held personally and corporately responsible to REPAY the bonding company that amount plus their expenses!
• The amount paid out in a claim cannot exceed the amount of the bid bond. • There is a time limit to the bid bond which corresponds to the time the tender is open for acceptance as per the spec. This time limit prevents an Obligee (owner) from deciding not the get the final bonds unless a problem occurs.

Performance Bond (CCDC)

• to guarantee the Principal’s (your) completion of the contract as per the plans and specifications.
• If you fail then the Surety will do so as long as the Obligee has performed it’s obligations under that contract and satisfied any conditions in the Performance Bond.
• The Surety’s liability is limited to the amount of the bond.
• Claim can be made within one year of date of final payment due
• CCDC wording preferred

Labour & Material Payment Bond (CCDC)

• Guarantees you pay all labour and material suppliers having direct contracts with you for labour and supplies for use on the project.
• The Obligee is designated as a trustee for those suppliers and subs but would not be able to claim under it themselves.
• If the principal (YOU) fails to pay, claimants can collect up to the penal sum of the bond. Payments under the bond will deplete the penal sum.
• Claimants required to give the Principal, Obligee and Surety notice by registered mail within 120 days of that date he last performed work or supplied material.

HOW MUCH DO BONDS COST?
(Remember you will have to build this cost into your tender price)
For Quickbond there is an annual fee between $1000 and $1500. All tender bonds will cost $250 and will be payable online at time of order
With a traditional bond facility the annual fee will typically range from $3500 to $5000/year and will include the cost of tender bonds throughout the year
PLUS
Final Bonds – when you get the job

Please view the premium calculators on the website to compute your potential bond costs so you can build the correct amount into your tender price

• Annual Rate so if the job goes over one year, anything left after the first year will be computed again
• Based on CCDC forms. These are the Canadian standard forms. If the obligee provides their own forms there will be an additional cost and it is important to submit those forms with your tender and final contract bond requests to ensure the bonding company will write those bond forms.
• Will be adjusted if job value changes
• GST added to contract price before computing but premium not taxable

THE APPLICATION PROCESS
Go the website and click on Apply. If your bond needs are going to be limited to jobs with a contract price of less than $1,000,000 and you qualify for Quickbond – follow that link. The process can take as little as a few hours or as much as a few days depending on your submission and the complexity If you wish to pursue a traditional bond facility follow that link. Allow 2 weeks for this process

The Decision

• There is no guarantee the process will result in approval and if you have paid the annual fee already and are not accepted that charge will be voided.
• Your submission will be approved only if we are confident you are qualified to perform the work program successfully and have the financial capacity to withstand the numerous risks involved in the construction business.
• If we feel we can bond your company remember each job is looked at on it’s own merits and there are no guarantees we can bond every job you want
• After underwriting your submission if we are able to offer you a bond facility you will be assigned limits. A single job limit which means the contract amount cannot exceed this number...and an aggregate limit which means the value of all your unfinished bonded work and outstanding tenders at any given time.

• You will be asked to sign an indemnity agreement prior to any bonds being released
• Indemnity agreement/MSA obligates the named indemnitors to protect the surety from any loss or expense.
• Your company, and any related companies will be required to sign this document as well as all shareholders and their spouses. Again – this is a PERSONAL and CORPORATE obligation. You are potentially signing away your house and cottage and anything else you may own if a claim is made on one of your bonds. There are other important conditions included as well that you should read and understand before committing to the bond process. We strongly recommend that you review this document with your lawyer so you fully understand the commitment you are making.

WHY YOU SHOULD SUBMIT ANY BOND FORMS INCLUDED IN A SPEC WHEN REQUESTING BONDS
If it's an onerous form the bonding company may be unwilling to write it. If that's the case and you didn't send it in at tender stage you won't be able to qualify your tender and if you are low bidder there will undoubtedly be trouble - your bid bond and/or agreement to bond could even be called.
If it's just a moderately bad form there may be a surcharge and you need to know about that at tender stage so you can build the increase into your price.

EXTENDED WARRANTIES
Think of this...there is a roofing warranty of 20 years on a building you built. 10 years down the road you sell the company or close it down. You retire to the cottage in Muskoka. There is a roofing problem on that project. The roofer is long gone. You provided a bond. You signed an indemnity agreement to the bonding company saying you would pay them back for anything they pay out on your behalf. The owner of the project claims under the bond. The bonding company have no defense. With an unbonded job it is only valid as long as the company is there to address it. Once it’s bonded there is a bonding company and they have your personal indemnity.

SURCHARGES FOR OVERRUNS AND UNDERRUNS
When a surety company issues a premium invoice for a bond, that premium is based upon their total exposure to loss over time. This includes any increases in exposures and also to decreases. • Periodically throughout a bonded job the Surety will send a Contract Status Report to the Obligee to track the job’s status. • If at the end of the job, there needs to be an adjustment to the premium charged then it will be done at this time