Do Private Construction Projects Require Surety Bonds?

Whether you’re new to the construction industry or a skilled tradesperson in your chosen path, you’ve probably learned about or encountered surety bonds. You may have even explored getting a bond for your construction company.

They’re almost always mandated in public contracts as the government looks to protect taxpayer dollars and uphold contractual obligations, however, the landscape for private ventures varies. So, the answer is complicated.

The decision to secure a surety bond for a private project isn’t just about meeting contractual stipulations; it’s about mitigating risks, enhancing credibility, and fostering trust among stakeholders.

In this article we’ll break down the nuances of surety bonds for construction contracts in the private sector, shedding light on their significance and the value they bring to the table.

The Purpose of Surety Bonds in Construction

Surety bonds serve as critical instruments within the construction industry, acting as a three-party agreement among the principal (you), the obligee (project owner or developer), and the surety (bond provider). At their core, these bonds are designed to instill confidence and assurance in the project’s stakeholders.

One primary purpose of surety bonds is to ensure that contractual obligations are fulfilled. By requiring a bond, project owners can be confident that the contractor will adhere to the terms, specifications, and timelines outlined in the construction agreement. This adherence minimizes the risk of project delays, cost overruns, or subpar workmanship.

Furthermore, surety bonds act as a financial safeguard. If a contractor defaults on their obligations—be it due to financial insolvency, failure to meet project specifications, or other breaches—the surety steps in. The surety may provide financial compensation to the obligee, ensuring that the project can continue without significant disruption or financial loss.

Beyond these tangible benefits, surety bonds play a pivotal role in fostering trust and credibility within the construction ecosystem. They signify a contractor's commitment to professionalism, reliability, and accountability, reinforcing their reputation in a competitive marketplace.

Surety Bonds vs. Insurance

Though contractors may need both surety bonds and insurance policies to work on a given project, these two risk management strategies aren’t interchangeable. You need to understand them both before considering a bond for your construction company.

Standard construction insurance policies guarantee that the insurer will reimburse the contractor in case of a claim or financial loss borne out of unfortunate or unexpected situations. For example, if a contractor were to have their tools stolen off the job site despite taking proper precautions, their insurance company would reimburse them.

What’s important to understand is that surety bonds for construction contracts guarantee the fulfillment of a stipulated requirement—be it project completion, payment, etc —to protect the interests of the project issuer. Otherwise known as a “company guarantee bond,” they dictate that the surety company will front the costs of any losses incurred.

The Difference Between Public and Private Projects

Public and private construction projects operate within distinct frameworks, each with its own set of requirements, regulations, and financing structures.

Regulatory Framework

Public projects are often governed by stringent regulations, given their connection to government entities and taxpayer funds. This oversight mandates certain standards and protocols to ensure transparency and accountability. In contrast, private projects operate within a more flexible regulatory environment, allowing for greater negotiation and customization in contractual terms.

Bonding Requirements

Public projects frequently mandate surety bonds to safeguard taxpayer investments and guarantee project completion. Conversely, private projects may or may not require construction bonds, depending on the agreement between the parties involved and the perceived risks associated with the project.

Common types of surety bonds for construction contracts include:

• Bid bond
• Payment bond
• Performance bond

Funding and Financing

Public projects typically rely on public funding sources, such as government allocations or grants. In contrast, private projects often secure financing through private investors, banks, or other financial institutions, leading to variations in project timelines, budget constraints, and risk-sharing mechanisms.

Despite these differences, many private project owners are now requiring independent contractors and business owners to acquire a bond before bidding on a contract. Beyond protecting them from mistakes or poor workmanship, bonds can help mitigate post-pandemic issues such as increased materials costs and ongoing labour shortages.

Any notion that surety bonds for private construction contracts weren’t a thing has effectively gone out the window—they are here to stay!

The Advantages of Having a Bond for Private Projects

While a company guarantee bond usually protects the client from financial losses, getting one can also protect your business.

One of the most immediate benefits of getting bonded is being able to bid on bigger projects. Private projects are competitive. Project issuers want to feel confident that you’re going to get the job done—or that they’re protected if you don’t.

Acquiring a construction bond is a tedious process. Your business will undergo rigorous checks from the surety company to verify your credibility and that you have the financial capability to see a project through to the end. Clients know this, meaning a surety bond proves you’ve been vetted.

While surety bonds for construction contracts in the private sector may not be required by law, they’ve become increasingly commonplace. As such, for the reasons we’ve detailed above, getting a bond for your construction company is a wise idea.

The Cost of Getting Bonded

The cost of surety bond premiums is generally 1% to 3% of the project value.

When evaluating whether or not to obtain surety bonds for construction contracts, it’s important to weigh this cost against the long-term benefits.

Think about how much it would cost you to back out of a semi-completed project! Construction bonds will ensure that you only take projects you can handle, which, upon completion, should cover the costs and much more.

Take the Next Step to Protect Your Construction Business

Navigating the landscape of private construction projects demands clarity, foresight, and proactive measures. If you’re looking to elevate your projects and build trust with stakeholders, now is the time to explore the potential of surety bonds for construction contracts.

Don’t leave your success to chance. KASE Insurance is the most trusted choice among construction companies and contractors when it comes to their surety and construction bond needs. Our team of brokers is intimately familiar with the construction industry in the Greater Toronto Area and we stand ready to assist you should you have any questions or concerns.

Reach out to a member of our team to get started with a quote!