Contract surety bonds are used primarily in the construction industry. These bonds protect the owner (obligee) from financial loss in the event that the contractor (principal) fails to fulfil the terms and conditions of their contract.
Commonly Used Contract Surety Products
There are five commonly used contract surety products. The first three are used at the pre-tendering or tendering stage and the last two are used for contract performance.
- Prequalification Letter;
- Consent of Surety/Agreement to Bond;
- Bid Bond;
- Performance Bond; and
- Labour and Material Payment Bond.
Types of Contracts Secured by Surety
The most common types of projects secured by surety in the public sector are:
- Project security for construction contracts;
- Performance security for service contracts (e.g. recycling, waste collection, snow removal); and
- P3 contracts (e.g. hospitals).
Industry Licensing Requirements
In Canada, surety bonds may only be issued by companies licensed to do so, either federally, or by one of the provincial insurance regulatory bodies. The requirements to obtain such a license are demanding and applicants are required to demonstrate financial solvency and sufficient strength to meet potential claims obligations. Only firms that are licensed to sell surety bonds in Canada may become members of the Surety Association of Canada.
Find out more about industry licensing requirements or for a list of provincial/territorial regulators.