A surety bond is a guarantee from a surety company that you will do what you promised on a contract. Public construction work uses three main bonds: a bid bond (you will sign the contract at your bid price if you win), a performance bond (you will complete the work) and a labour and material payment bond (your workers and suppliers will be paid). Bonding is not insurance. Before any bonds are issued you sign a General Indemnity Agreement, which means you, and often co-signing owners and spouses, are personally on the hook to repay the surety for any claim it pays. Building a bonding facility is therefore a slow, financial exercise you should start long before you need it.
The three bonds
- Bid bond: submitted with your bid, it guarantees you will enter the contract at your bid price if awarded. If you win and then refuse, the bond compensates the owner for the difference between your bid and the next compliant bid, up to the bond's face amount. On federal construction, bid security is commonly required once a project's budget passes a set figure, and the required amount is often expressed as a percentage of the tender (for example around 10 percent on smaller jobs), with a sliding scale and a cap on larger ones. Treat any single percentage as indicative and read the exact requirement in the tender documents.
- Performance bond: guarantees the project is completed if you default. The surety either funds your completion or arranges another contractor.
- Labour and material payment bond: protects your workers and suppliers (and on Ontario public work, your subcontractors directly) if you do not pay them.
Bid bonds usually have to be submitted as signed originals; a fax or photocopy is not accepted on federal tenders. Many jurisdictions now take electronic bid bonds, and Defence Construction Canada specifically requires electronic bid security.
Ontario's mandatory bonding threshold
Section 85.1 of Ontario's Construction Act requires performance bonds and labour and material payment bonds on all public contracts of $500,000 or more. Each bond must cover at least 50 percent of the contract price, though an owner can require up to 100 percent. "Public contract" covers the Crown, municipalities and the broader public sector, and the rule has been in force since 2018. In plain terms, you cannot bid Ontario public work above $500,000 without a surety facility already in place. Other provinces have their own triggers and many owners require bonding by choice on smaller jobs, so always read the specific tender rather than assuming a threshold.
What underwriters look at: the three Cs
Every surety underwriter in Canada weighs three things.
- Capital, your financial strength. Working capital (current assets minus current liabilities), net worth, steady profitability and cash flow. Working capital is the single biggest lever on how much you can bond. As a rough guide, sureties want analyzed working capital in the order of 5 to 10 percent of your total bonded work program, though the exact ratio is the underwriter's call.
- Capacity, your ability to deliver. A track record of completed projects (type, size and outcome), your key people, equipment, subcontractor resources and current backlog. A common rule of thumb is that your next bonded project should be no larger than about 1.5 times your biggest completed job.
- Character, your reputation. Personal and business credit, honesty during the application, and references from owners and suppliers. Underwriters often treat character as the deciding factor on a borderline file.
What you have to hand over
Sureties scale the financial statements they want to the size of your program: a compilation (notice to reader) for the first small bonds, a review engagement once you grow, and an audit for very large programs. They also typically want interim financials if you are more than six months past year-end, a current work-in-progress schedule for active jobs, bank reference letters, personal financial statements from owners with a meaningful stake (who must sign the indemnity agreement), and your receivables and payables aging.
Bond premiums (indicative only)
Bond premiums are a cost of the work and are quoted per thousand dollars of contract value. As a general indication from recent Canadian market data, a performance bond often falls in the region of $7 to $10 per $1,000 of contract value, and a labour and material payment bond in the region of $3 to $5 per $1,000. These figures move with the surety, your standing and the project, so treat them as a planning estimate and get a real quote from your broker for any specific job.
A practical path to a bonding facility
Building capacity is roughly a year's work, not a bid-day task:
- Ask a construction-focused surety broker for a candid underwriting analysis and find your top three gaps.
- Close your books monthly and prepare clean financial statements with a CPA who knows construction.
- Put job-cost reporting and a monthly work-in-progress schedule in place.
- Retain earnings in the business rather than paying out every dollar, which builds working capital.
- Keep personal and business credit clean, because underwriters pull both.
- Grow project size gradually. Do not try to leap from a $200,000 job to a $2 million one in a single bid.
A broker with delegated authority from the surety can approve many smaller bonds on the spot, which speeds you up once the facility is set. The cardinal rule: never wait until bid day. Bond approvals take days to weeks, so have the facility ready before tender season.
Common mistakes
- Confusing surety with insurance. You repay every claim the surety pays. The indemnity agreement is personal.
- Applying on bid day. A facility takes time to set up. Build it ahead of the season.
- Quoting a bond percentage as fixed. Premiums and required bid-security amounts are indicative and vary by surety, project and jurisdiction.
- Distributing all profit. Retained earnings are working capital, and working capital is your bonding ceiling.
- Jumping in project size. A leap far beyond your largest completed job spooks underwriters.
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