Builders risk and surety bonds are two very different things that both show up on construction projects. Builders risk (also called course of construction, or COC) is a property insurance policy that pays for physical damage to a structure while it is being built. A bond is not insurance at all: it is a three-party guarantee that you will perform, backed by a surety that you must repay if it has to step in. On Ontario public contracts of $500,000 or more, a performance bond and a labour and material payment bond are mandatory. Knowing which is which keeps you compliant and out of disputes.
Builders risk / course of construction
Builders risk and course of construction are the same product under two names. It is a short-term property policy that covers physical loss or damage to a structure under construction, including materials on site, in transit and in temporary storage, from perils such as fire, wind, theft, vandalism and explosion. It runs from groundbreaking to completion. It does not cover consequential losses (those sit under CGL, see Commercial General Liability) and it does not cover employee dishonesty.
Who buys it. Usually the property owner. The general contractor buys it only if they own the building or the contract assigns them the duty. The standard CCDC 2 stipulated-price contract puts builders risk on the owner. Decide this in writing before you break ground: the classic gap is owner and contractor each assuming the other arranged it.
Cost. Indicatively, builders risk runs about 1 to 5 percent of the total construction budget, so a $2 million build might generate roughly $20,000 to $40,000 in premium depending on scope, location, type and duration. That is a benchmark range, not a quote.
Bonds are a credit relationship, not insurance
A surety bond is an extension of credit. There are three parties: the owner (obligee), you (the principal), and the surety. The surety guarantees your performance to the owner, but you sign an indemnity agreement promising to repay the surety for anything it pays out on your behalf. Unlike insurance, a bond cannot be cancelled once issued, and a loss is not "spread" across a pool; it comes back to you. If you default, the surety can finance you to finish, bring in a replacement contractor, complete the work itself, or pay the owner the cost to complete.
The three bonds you will meet
The Canadian Construction Documents Committee (CCDC) publishes three standard bond forms, updated in May 2024 (the 2024 forms replaced the 2002 versions, with the same conditional, default-triggered risk profile):
- Bid bond (CCDC 220): guarantees that if you win the tender you will enter the contract and provide the required performance security. It is typically 10 percent of the tender price, and it covers the owner for the gap between your price and the next acceptable bid if you walk away.
- Performance bond (CCDC 221): guarantees you will complete the contract to its terms. Indicative premium is about $7 to $10 per $1,000 of contract value (roughly 0.7 to 1.0 percent), rising to 2 to 3 percent or more for newer or weaker contractors.
- Labour and material payment bond (CCDC 222): guarantees your subcontractors and suppliers get paid. Indicative premium is about $3 to $5 per $1,000, and it is often bundled with the performance bond.
How sureties decide: the three C's
Sureties underwrite you on Capital, Capacity and Character: your financial strength and working capital, your resources and track record to handle the work, and your reputation and payment history. A useful rule of thumb is working capital of roughly one tenth of your bonded work in progress. To enter the surety market, expect to provide three years of clean financial statements (ideally from a construction-specialist CPA) and a current work-in-progress schedule.
When bonds are required on public work
Mandatory bonding thresholds vary by jurisdiction:
- Ontario: under section 85.1 of the Construction Act, public contracts of $500,000 or more require BOTH a performance bond and a labour and material payment bond, each at a minimum of 50 percent of the contract price. A 2024 amendment caps the required coverage at $250 million for very large contracts.
- New Brunswick: Crown contracts of $500,000 or more require a bid bond and a payment bond; below that, bonding may be required at the owner's discretion.
- Federal Crown work: frequently bonded, but with no single statutory threshold like Ontario's.
- Nova Scotia: bonding is set project by project, with the province publishing its own bond forms.
- AB, BC, MB, SK, QC, PEI, NL: no provincial statute equivalent to Ontario's section 85.1. Bonding may still be demanded by individual public owners in the tender documents.
For a labour and material claim in Ontario, a claimant must give written notice to the surety, contractor and owner within 120 days of last supplying labour or materials.
Common mistakes
- Treating a bond like insurance. You indemnify the surety. A default that the surety pays out becomes your debt.
- Assuming the other party bought builders risk. Name the responsible party in the contract before the first shovel goes in.
- Bidding public work without bonding capacity. On an Ontario public job over $500,000 you cannot proceed without both bonds. Build your surety relationship before you tender.
- Ignoring the L&M claim clock. Miss the 120-day notice and a valid payment claim can fail on timing alone.
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