Different Types of Construction Bonds in Canada

Construction is one of the most critical industries in Canada. Over 1.4 million people work in this industry, contributing around $141 billion to the country’s economy. It accounts for 7.5% of Canada’s GDP.

As the construction industry plays a crucial role in the Canadian economy, construction bonds are extremely popular among contractors and investors. These bonds are issued by a surety company to stand as a surety between the obligee (the project owner) and the principal (the contractor). It ensures that the contract is made appropriately and the services are provided according to the set terms and conditions. 

This helps safeguard the investment of the obligee and increases the credibility and competitiveness of the contractor in the market. As per the law, only those surety companies can provide performance bonds canada that are licensed by the federal government or any provincial insurance regulatory body.

A surety company acts as a third party that steps in if a contract is not completed or does not meet set standards for quality. For example, if a contractor abandons a project or delivers low-quality work, the surety would compensate the investor for the initially invested amount. 

There are various types of construction bonds. Almost all federal constructions and private projects in which a considerable amount of money is invested require surety bonds such as performance, bid, and maintenance bonds. These bonds hold immense significance in the industry, assuring investors about the contractor’s qualifications and ability to complete the project. 

Below is a brief guide to the types of construction bonds that are accepted in Canada:

Three Types of Construction Bonds in Canada

There are three types of construction bonds in Canada. They are as follows:  

Performance Bonds

Performance bonds in Canada, also called contract bonds, guarantee that the contractor will perform the work according to the contract. It makes sure the project is completed by the scheduled date and as per the set standards by the investor.

The Obligee can claim a performance bond if the contractor fails to meet all duties as specified in the contract. Hence, investors are not liable for financial losses, i.e., they don’t have to bear the cost of redoing or completing the project by another contractor.

Bid Bond

An official bid bond is an attachment to the contractor’s tender package and is given to the project owner when the tender closes. The bid bond ensures the owner that a contract will be negotiated if the low bidder wins the project. 

When they fail to do so, the owner can obtain the difference between the first and second bidder or the bond value, whichever is less expensive. If the contractor backs out, the bid bond protects the owners, and they don’t have to pay more to re-tender or hire a second bidder.

Maintenance Bonds

A maintenance bond is another type of construction bond in Canada, which is also called a warranty bond. It guarantees that the contractor delivers a defect-free project concerning the material and quality. 

Typically, this bond lasts for a specified amount of time following the completion of a construction project. The obligee can use this bond to claim for any damage and repairs caused by defects in the construction by the contractor during this period. 

This bond is quite popular in the country as it serves as additional insurance once a construction project is complete. It provides investors with peace of mind regarding future issues, as they will get covered under the bond policy.

Conclusion

More than 700K construction companies in Canada earn approximately $1 billion annually. These statistics highlight the significance of the construction industry in the country. If you are a construction contractor, there is undoubtedly a huge scope for increasing your profit margin in the industry by establishing your company’s credibility before the investors. 

A surety bond will work as a certificate of reliability and quality of your company and help you gain the investors’ confidence for better business opportunities. While looking to get a surety bond, it is necessary to obtain them from a well-established surety company to avoid misunderstandings and issues in the contract and bond claim process. 

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