A surety bond is not insurance. It is a three-party guarantee that you will do what you promised, backed by a surety company that you must pay back if it ever has to step in for you. The three bonds a Canadian contractor meets are the bid bond, the performance bond and the labour and material payment bond, and they protect the project owner and your subcontractors, not you. On Ontario public contracts of $500,000 or more, a performance bond and a labour and material payment bond are both mandatory. Understanding that a bond is a credit relationship, not a safety net, is the single thing that keeps contractors out of trouble.
Why a bond is not insurance
With insurance, you pay a premium and the insurer absorbs the loss. With a surety bond, you pay a premium but you also sign an indemnity agreement promising to repay the surety for anything it pays out on your behalf. There are three parties: the owner (the obligee who is protected), you (the principal who must perform), and the surety (which guarantees you to the owner). The surety is essentially co-signing for you, the way a parent co-signs a loan. If you default and the surety pays, that money becomes your debt.
Two more differences matter. A bond cannot be cancelled once it is issued: the surety stays on the hook until the contract is fully performed. And a bond loss is not spread across a pool of policyholders the way an insurance loss is. It comes straight back to you. This is why a bond protects the project, not the contractor. Your own protection comes from the insurance stack instead (see Commercial General Liability).
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, but the risk profile did not change: they remain conditional instruments that respond only when you default.
- 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 after winning.
- Performance bond (CCDC 221). Guarantees you will complete the contract to its terms. As an indicative rate only, the premium is roughly $7 to $10 per $1,000 of contract value (about 0.7 to 1.0 percent), rising to 2 to 3 percent or more for newer or weaker contractors. Treat that as a benchmark range, not a quote.
- Labour and material payment bond (CCDC 222). Guarantees your subcontractors and suppliers get paid. The indicative premium is about $3 to $5 per $1,000, and it is usually bundled with the performance bond.
A fourth, the maintenance bond, runs roughly $1.50 to $2.00 per $1,000 and typically covers a 24-month maintenance period. As a combined figure, bonding often lands somewhere in the 0.5 to 3 percent of contract value range depending on your strength. For a $1 million contract bonded at 50 percent, the performance bond premium might be in the few-thousand-dollar range and the payment bond a bit less, but only your surety can price your actual file.
How a surety decides: the three C's
Sureties underwrite you on Capital, Capacity and Character.
- Capital: your financial strength, working capital, equity and debt levels. A common rule of thumb is working capital of roughly one tenth of your bonded work in progress.
- Capacity: your resources, experience and manpower to handle the project type and volume, measured as a single-job limit and an aggregate limit across all bonded work at once.
- Character: your reputation, payment history, credit and management quality.
To enter the surety market expect to provide three years of clean financial statements, ideally from a construction-specialist CPA, plus a current work-in-progress schedule. Build that relationship before you bid bonded work, not the week the tender closes.
When bonds are mandatory on public work
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 July 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: set project by project, with the province publishing its own bond forms.
- Alberta, BC, Manitoba, Saskatchewan, Quebec, PEI, Newfoundland and Labrador: no provincial statute equivalent to Ontario's section 85.1, but individual public owners can still demand bonding in the tender documents.
The payment-bond claim clock
A labour and material payment bond is only useful to a subcontractor who claims on it in time. In Ontario, a claimant must give written notice to the surety, the contractor and the owner within 120 days of last supplying labour or materials. Miss that and an otherwise valid claim can fail on timing alone. If you are owed money on a bonded job, the payment bond runs alongside your lien and prompt-payment rights, not instead of them.
Common mistakes
- Treating a bond like insurance. You indemnify the surety. A default it pays out becomes your debt, and the bond cannot be cancelled.
- Bidding bonded work with no surety relationship. On an Ontario public job over $500,000 you cannot proceed without both bonds. Set up your bonding capacity before you tender.
- Letting the financials lapse. No current statements and no work-in-progress schedule usually means no capacity. Keep them ready.
- Missing the 120-day payment-bond notice. A valid claim on a labour and material bond can be lost purely on the clock.
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