Construction Bonds for Contractors

The construction industry generates around $141 billion annually, making it a big part of Canada’s economy.

When contractors work on complex projects, it progresses their careers and opens up doors to future business opportunities. These projects range from building residential properties and maintaining back offices to constructing government-funded public facilities.

However, being awarded these projects requires entering a bond agreement that guarantees the terms of the project will be fulfilled within a given deadline. While there are several types, construction bonds are the most common. 

What Is a Construction Bond?

Construction bonds are a type of surety bond used to ensure the involved parties see a project to completion. Often used in government-funded projects, these agreements protect those who issued the project against financial losses.

This type of bond involves three parties:

• The obligee is the party requiring the bond. This is the party directly protected by the bond in case the contract isn’t fulfilled according to industry standards or however it is stipulated in the agreement.
• The principal is the party purchasing the bond. This is the party obligated to complete the project as promised.
• The surety is the insurance or bond company guaranteeing the project will be completed. The surety’s obligation to the bond will only be triggered if the principal cannot meet the terms of the contract. 

Bonds used in construction let the obligee know you are a reliable business and financially capable of completing a project. Being backed by a surety company builds trust with clients and shows them you are qualified to work on the project.

Why Are Construction Bonds Important?

Few project owners will risk hiring a contractor who cannot guarantee the completion of a project or is financially incapable of taking responsibility. Construction bonds assure project owners that you can get the job done and pay everyone appropriately, as the inclusion of a surety company guarantees they will not suffer for mistakes. 

They can include the following:

• Bid bond: This declares the contractor will acquire the required bond if they win the bid for the contract. Bidding for a larger project almost requires a bid bond for liability reasons. 
• Performance bond: This type of bond guarantees a contractor can finish the project on time while meeting necessary standards for quality. This is “industry standard” unless defined otherwise in the agreement. 
• Payment bond: This type of bond holds the principal responsible for paying other parties to the project—such as subcontractors and vendors—throughout the working duration of the project. 

How Do Construction Bonds Work?

Construction surety bonds protect the obligee from financial risks in case of a default, which can be defined as a breach of contract. The obligee may file a claim against the bond if the principal were to breach the contract by delaying the project, for instance. 

As long as the claim is valid, the surety provider will then step in to resolve the situation and take on the financial obligations to ensure the project will reach completion. This could include paying workers to continue with their work. 

Once the claim is resolved, the surety will ask the principal to reimburse the expenses incurred during the settlement that they temporarily covered.

How to Apply for a Construction Bond

The application process varies depending on several factors, such as the nature of the project, the size of the bond, and the provider issuing the bond. 

The process typically includes the following:

1. Review the application requirements of the job to see if a bond is needed
2. Obtain a bid bond from the bonding agent and submit it along with your proposal
3. Provide your bond agent with the results of the bid, regardless of it you win 
4. If you win the bid for the project, request a bond as soon as possible from your surety provider to get the ball rolling
5. Complete the project according to its terms, then tell your bonding agent to free up your bond line once finished

How Are Construction Bonds Beneficial to Contractors?

Bonds are typically used to protect the project owner in case of a breach of contract, which could be time-consuming to resolve and result in major financial losses. They offer a way to manage risks by incentivizing the principal to meet the conditions of the project by requiring them to pay if the project is compromised.

However, bonds are also beneficial to contractors.

Before one is issued, surety providers must assess the principal’s financial capabilities to complete a project. If you are issued a bond, it builds rapport with your clients by proving you are a qualified and reputable business. 

They also ensure workers—such as subcontractors, suppliers, and others who are involved in the project—are paid for their work. 

The surety will step in and bear the obligations If the principal fails to make payments. This protects the principal from facing lawsuits or delays in the project’s completion. Afterward, the principal will agree on a manageable payment plan with the surety provider to reimburse them for the costs of fronting the outstanding wages.

Need A Construction Bond? Call KASE Insurance!

Bigger contracts also mean taking on bigger risks, and these could leave you in financial distress if you’re not careful. To minimize risks, work with a trusted surety and insurance provider that can get you the best possible plan for your needs. 

KASE Insurance is an award-winning insurance brokerage in Toronto that provides fully customized insurance solutions for all of our clients. We provide a wide variety of businesses with comprehensive policies tailor-fit to meet their unique needs.

Ready to get started? Contact us today for a construction bond quote!