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What are Bid Bonds?
A bid bond guarantees that the contractor (otherwise known as Principal) will enter into a contract with the project owner (also called Obligee) if they are the low bidder on a project and are awarded a tender. Owner’s ask for bid bonds because they don’t want to sustain the cost of a re-tender if a bidder is low and awarded and subsequently backs out of the contract. What the bid bonds says is that if a bidder who is low and awarded backs out of a contract, the project owner has the right to claim on the bid bond for the value of the bid bond or the difference between the first and second bidder, whichever is lowest.
Sometimes project owners will also ask for another type of surety bond called a consent of surety (also know as agreement to bond). This document is provided with the bid bond at the tender stage and is a guarantee from the surety company that if the principal is low and awarded, the surety will provide the required construction bonds (i.e. performance bond and/or labor and material payment bond).
Surety For Tendering Stage
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Pre-qualification Letter
A pre-qualification letter is not a bond. It is a letter from Surety to the owner that confirms the “bondability” of its contractor client. A pre-qualification letter is not binding.
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Bid Bond
It is a bond issued to serve as a guarantee to a project owner that the winning bidder will satisfy the terms of a tendered contract.
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Consent of Surety
Consent of Surety is also known as Agreement to Bond. It is a legal commitment, but it is not a true bond as it is only executed by the surety, not the contractor. This letter confirms to the project owner, that should the contractor be awarded the job, the surety will provide the performance and payment bond as per the terms outlined in the letter.
Who Needs a Bid Bond?
There are a variety of businesses that require bid bonds. The most common are construction companies. An example would be a general contractor building a hospital or mechanical contractor upgrading the HVAC systems in an arena.
Common Types of Contractors that Require Bid Bonds:
- General Contractors
- Electrical and Mechanical Contractors
- Snow Removal and Landscape Contractors
- Sewer & Watermain Contractors
- Road Paving Contractors
- Heavy Civil Contractors
The use of these bonds has increased significantly over the past few years as various provinces have looked at re-vamping their Construction Acts. Ontario was the first to finalize this process and has made bid bonds mandatory on all publicly funded construction projects over $500,000 in value. This has had a ripple effect in the private sector with a number of consultants writing the requirement for bid bonds into their tender specifications.
Types of Public Owners that Require Bid Bonds:
- Municipal Owners
- School Boards
- Ministry of Transportation Ontario
- Public Works Canada
- Defense Construction
- Hospitals
To secure a bid bond a contractor will need to have a surety facility. If you are thinking about bidding on public work, please reach out to FCA to discuss how we can help in establishing this for your business.
FAQ
An annual surety fee can range anywhere from $1,500 to $3,000 and is typically billed each January 1st. This fee covers the cost of the surety companies underwriting but it also covers the cost of any bid bonds, surety’s consents or prequalification letters you require. In essence, once you’ve established your facility and paid the annual surety fee you can get as many bid bonds, surety’s consents and prequalification letters without any additional cost in the following year.
Once you have established a surety facility the process to obtain these bonds is very easy. When you identify a project that you would like to bid that has a requirement for a bid bond, you would prepare what is called a bond requisition form. This form provides some basic details on the project you are looking at bidding. This would include who the project owner is, your estimated tender price, closing date of the tender and estimated project duration. You would then submit this bond to your surety broker and they would prepare your bonds and have them ready well ahead of the tender close.
It is important to note that once you have a facility, the individual jobs do not require approval from the surety. Providing the bond requisition is purely a way for the surety broker to get the basic information they require to complete your bid bond.
If there is a project you are interested in that is larger than your facility limits, your broker should be helping you build the business case around that project so that you can secure approval from your surety company.
A surety company will look at a variety of items when establishing a surety facility and providing bid bonds. They look at the capital of the business, character of the owners, and capacity of the company to execute the work.
Capital refers to items like the financial strength of the business, personal net worth of the owners and ability to cash flow the work the business intends to undertake.
Character relates to an owner’s past history of completed projects, their ability to provide timely and accurate reporting and strength of their references.
Capacity refers to a company’s ability to execute the work it intends to bid. This includes what accounting systems the business has, what project management expertise and tools they use and whether they have the required equipment.
This process can look complicated but it doesn’t have to be. Having an experienced surety broker that understands this process and has the right markets will ensure that establishing a surety facility is an easy and transparent process. Please reach out to FCA to discuss how we can best help your firm establish a surety bond facility.
When you establish your surety facility with your broker you will be provided a single job limit and an aggregate limit. An aggregate limit is the total cost to complete of all of your outstanding work at any given point in time. You will also be provided with your surety bond rates for any performance and labor and material payment bonds you require and will also be charged an annual surety fee.
Bonding Facility Example:
Single Contract Limit: $1,000,000
Aggregate Contract Limit: $5,000,000
It is important to note that these limits are guidelines but are never set in stone as contractors require flexibility with their limits to ensure they can properly service their clients and grow their business.
As a long-standing surety brokerage we have excellent working relationships with all of the surety companies currently operating in Canada. Our key partners include:
- Intact
- The Guarantee Company of Canada (GCNA)
- Trisura Guarantee
- Aviva
- Travelers
- Northbridge
- Zurich
- Western Surety
- Economical
- The Hartford
We know these companies well and understand their underwriting philosophies and principles. This is very important as no two sureties are alike. By understanding the appetites of each company, we are able to place our clients with the right surety partner. This ensures not only excellent terms but also a long-standing relationship that supports the growth and flexibility that our contactors demand.
Why Choose FCA Surety?
Ease of Doing Business
We set the industry standard for turnaround time for both new and existing clients, you can expect excellence.
Trusted by Surety Markets
Outstanding relationships with all of the most reputable surety bond markets in the industry, giving you the power of choice.
Surety is What We Do
Our industry-leading team boasts seven full time dedicated surety professionals with a combined 80+ years of experience.
Testimonials
Our organization has been working with FCA Surety Bonds and Insurance for over 2 years. The team, led by Jamie Collum and Warren Griffiths, exceeds expectation in service, responsiveness and construction knowledge. Our business needs often demand last minute bonding, and we have never been disappointed by FCA. Always going above and beyond to deliver the right solution in a seamless and effortless manner. We highly recommend FCA for all construction insurance needs.
Rebecca
After 6 years in business, our construction company was asked to provide bonding for 3 very important projects that were awarded to us. We had no idea where to start as bonding was something totally unknow to our organization. A quick search online, and let me say, we couldn’t have found a better company to assist us…. FCA! Andrew and his team were quick to explain the intricacies of bonding, all the requirements including processes. They took their time to clearly explain and educate us on all that is bonding. They were patient and they took the time to walk us through the necessary steps to get us started and set up. These days, it is rare to recieve this level of support. I highly recommend FCA!
Max
FCA is one of the best companies we have had the pleasure of working with so far. Very professional, fast and always on time. Looking forward to continue working with them.
Mo
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It all starts with a conversation today with one of our surety bonding experts. Once we determine which type of surety bonds you require, we will work tirelessly to expedite these bonds for you.