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:
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.
Construction owners will often ask for an “agreement to bond” to accompany the bid bond at the tender stage. This document simply states that the bond company is willing to issue the requisite performance and labour and material bonds should the contractor be awarded the job. This document adds to the prequalification role that the bid bond plays as a bond company would not issue one without been comfortable with tender. An agreement to bond is sometimes referred to as a “consent to surety”.
The purpose of a bid bond is to provide assurance to the project owner that the bid was submitted in good faith. Should a contractor be awarded the contract and decide not to undertake the job, the project owner can then use the bond to cover the difference between the awarded and second lowest compliant bidder. With a value of 10% of the contract price, the bond is almost always sufficient in covering the difference between the two bidders.
The most widely used bid bond was created by the Canadian Construction Documents Committee, the most recent version being the CCDC 220 – 2002 bid bond which created the 10% standard. While most bid bond requirements call for a 10% bid bond they can vary from 5% to 15% of the tendered amount.
For a more complete explanation, please read our 10% bid bonds article.
There are a few key differences between a bid bond and a performance bond.
Project owners will specify their security requirements at the tender stage. If a bid bond is specified and a contractor fails to provide one with their submission, the owner can and typically will disqualify the bid and award the second-lowest compliant bid.
Although owners may accept alternative security such as a letter of credit, contractors will almost always use a bid bond due to its many advantages over a letter of credit, most notably its non-impact on cash flow.
Although bonds are issued by insurance companies, a contractor will need to go through an insurance broker. Due to the unique nature of bonding, it is highly recommended that you work with an insurance broker that specializes in surety bonds. With a large number of markets offering surety products, having an experienced surety broker can be the contributing factor in obtaining the bonding limits you require at preferred market rates.
Typically a bid bond is 10% of the contract price, but that isn’t mandatory. Some owners will ask for 5%, a fixed dollar amount or any amount they think is worthy. The idea behind the bid bond is that the owner can recover the difference between low and second lowest bidder, and it provides a prequalification function. Standard practice and CCDC documents call for 10%.
Most owners specify the requirement for bid security of 10% of the contract price in the form of a bid bond, irrevocable letter of credit or certified cheque. This means that even if you don’t have a contract bond facility, you can provide another type of security and still qualify your bid. The problem with that method comes down to its effect on your cash flow. Other forms of security tie up cash and providing cash backed security for multiple bids could put your company in a cash crunch.
A project owner can make a claim if the selected contractor fails to enter into a contract upon award. This could be due to a change of heart or the inability to provide proper insurance, performance bonds, or other required documents.
When a demand is made by the project owner under a Bid Bond, the surety company will begin an investigation surrounding the circumstances of the claim. In an effort to establish if the claim is valid, the surety will focus on answering the following questions:
Should the surety find sufficient evidence surrounding the claim, they will then compensate the project owner for the resulting loss. Typically, the amount of the loss is the lesser of the value of the bond or the difference between the defaulting party and the next lowest compliant bid.
It is never the bond company’s intention to pay claims. Their function is to provide the guarantee and they charge a premium for that service. If the bond company pays a claim on your behalf they will look to be reimbursed by way of the indemnity agreement. This is the security document you sign when you establish your bond facility for all of your contract surety bonds.
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.
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!
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.