Understanding Your Obligations to Sub-Trades & Suppliers
What are Labour & Material Payment Bonds?
A Labour and Material Payment bondguarantees that the bonded contractor will pay all claimants for goods and/or services supplied for the bonded project. A claimant under a Labour and Material Payment bond is a trade contractor or supplier who has a direct contract with the bonded contractor to supply goods or services to the bonded job. Lower tier subs or suppliers are not protected under the standard Labour and Material Payment bond.
It is important to note that a payment bond is a companion document to the Performance bond, and the two should be executed together. Bonding companies typically will NOT issue a payment bond as a “stand-alone” obligation.
Like Performance bonds, owners typically ask for 50% of the contract amount, but Labour and Material Payment bonds can also be in the amount of 100% or any amount. The surety can never be liable for more than the total amount of the bond.
Types of Labour & Material Payment Bonds
CCDC Labour & Material Payment Bond
A standard surety labour & material payment bond form provided by Canadian Construction Documents Committee.
Form 31 Labour & Material Payment Bond
This is the new standard labour & material payment bond wording utilized in Ontario by all public entities for contracts over $500,000.
Federal Labour & Material Payment Bonds
The Federal Government provides its own Labour & Material Payment bond form which is a broad form text that covers both 1st and 2nd tier sub-trades and suppliers.
Who needs Labour and Material Payment bond?
There are a variety of businesses that require Labour and Material Payment bonds. In Ontario, surety bonds are mandatory on any publicly funded construction projects over $500,000 in value. As a result, anyone that is successful in bidding these contracts will be required to provide a Labour and Material Payment bond.
In addition, other public and private owners across Canada will require Labour and Material Payment bonds for both construction and service based work. Ultimately, a project owner wants to ensure that once it pays the prime contractor that all other trades and suppliers are paid. If the prime contractor does fail to pay the sub-trades and suppliers then the Labour and Material Payment bond will be there to protect the trades thus avoiding costly project delays.
FCA is Canada’s Labour & Material Bond Expert Since 1919
FCA has been providing Canadian companies with surety bonds since 1919. We have set the industry standard for turnaround time for both new and existing clients. We pride ourselves in ensuring our clients never miss out on an opportunity.
When you establish a surety bond facility your broker will provide you with a rating for the cost of Labour and Material Payment bonds. Project owners will ask for either 50% coverage or 100% coverage against the awarded contract price inclusive of tax. The cost of these bonds typically range between 0.2% and 0.5% of the contract price.
The factors that will affect the cost of Labour and Material Payment bonds include the following:
- Financial Strength of the Contractor – the stronger the contractors balance sheet the better case there is for a lower rate.
- Premium Volume – the more bonding premium generated the stronger the case for a lower rate.
- Track Record with Bonded Work – a long and successful history of completing bonded work will provide a better case for a lower rate.
As an example, for a $100,000 contract inclusive of tax, the Labour and Material Payment bond cost will range from $300 to $500.
Labour and Material Payment bonds are always required in conjunction with a Performance bond and cannot be issued on their own.
To obtain a Labour and Material Payment bond you must have an active surety bond facility. If you do not have an active surety bond facility then you should speak with an FCA Advisor today to learn how to establish a bonding facility for your company.
When applying for bonding the surety company will look at the Character, Capital and Capacity of your business.
Character: Does the contractor have a good track record, good references and integrity?
Capacity: Does the contractor have sufficient cash flow to service the job and to weather potential delays in payment? Is a line of credit in place, in case of emergency?
Capital: Does the contractor have the net worth position and working capital necessary to complete the project and support the various other projects they are undertaking?
Your FCA Advisor will explain to you why the surety considers Character, Capital and Capacity as the foundation for your bonding facility and how these are measured. Once they understand your business they will also explain exactly what documentation is required in order to proceed with an application for a bonding facility.
A board form Labour and Material Payment bond is a non-standard bond that provides coverage to both trade contractors and suppliers with a direct contract with the bonded contractor and those one tier below the trade contractors and suppliers who hold a direct contract with the bonded contractor.
Yes, the new Form 32 bond is a broad form bond which provides coverage to 2nd tier trade contractors and suppliers.
Yes, under section 39 of the Ontario Construction Act, trade contractors and suppliers are entitled to see a copy of the Labour and Material Payment bond. In fact, the owner is actually holding this bond in trust for the benefit of trade contractors and suppliers.
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:
- The Guarantee Company of Canada (GCNA)
- Trisura Guarantee
- Western Surety
- 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 contractors 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.
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.
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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.