Performance Bonds

Becoming a bonded contractor can be easy if you choose to work with the right broker. An experienced and knowledgeable surety broker will know the industry and understand your business. They will have a number of surety markets they work closely with and will be able to easily fit you with the right surety company for your business.

Documents commonly required to apply for Performance Bonds:

• Financial Statements for your Company
• A Contractor’s Questionnaire (to be provided by your FCA Advisor)
• Personal Net Worth Statements for the owner(s)
• A copy of your Banking Terms & Conditions Agreement for your Operating Line of Credit (if one is established)
• A Professional Resume for Key Employees (or LinkedIn Profiles)

Surety companies will look at the character of the owners of the business. This includes their past experience, reputation and years in business. It can also include reference checks.

They also look at a contractor’s capacity. This includes their project management team, estimating and internal back office functions and whether these are adequate for the work they intend to target.

Lastly, they will look at a contractor’s capital. This often includes review of corporate financial statements and personal financial statements of the owners. A good surety broker will also be able to identify what items are important and what items are not as they look to understand your business. This will avoid you having to fill out multiple forms and applications un-necessarily.

Once all of the documentation has been provided, a surety facility can be approved and open within 24-48 hours.

Generally speaking a performance bond can cost anywhere from 0.5% to 1.5% of the awarded contract price inclusive of HST. Where the cost ultimately sits in this range depends on the amount of coverage the owner is requiring. Usually this is either 50% of the contract price or 100% of the contract price. The higher level of coverage requested the greater the cost. Warranty timelines will also impact the cost of a Performance Bond.

To determine pricing for a Contractor a surety company will evaluate the 3 C’s of Surety when looking at your application for a performance bond facility. These are character, capital and capacity. The more comfortable a surety company is with your business, its owners and the financial strength the lower the rate can go.

The amount of premium generated through your performance bond facility will also have an impact. Contractors who generate a lot of bond premium can expect lower rates than infrequent users of bonds.

Lastly, the duration of the contract can impact the cost. Rates are generally provided for a one-year period. If durations are in excess of 12 months then an additional premium may be charged. Surety companies may have special ratings for larger, long term projects so make sure you discuss with your surety broker to ensure you are receiving the best price.

Performance bonds are different from insurance in one critical way. With insurance, the insurance company provides your business with a policy, if your business experiences one of the perils in your insurance policy the insurance company will provide you with compensation.

With a performance bond the coverage is provided to the project owner (also called the Obligee). If the project owner makes a valid claim against your performance bond and the surety is forced to pay a claim, they will then look to your business to recover those losses.

At FCA Surety, we know that every company starts somewhere. If you are a new company or a smaller construction firm targeting jobs under $1,000,000 and have been told you don’t qualify for bonding, the FCA FirstBond™ for New and Emerging Contractors program might be perfect for you.

FirstBond™ is a quick and easy solution for new and emerging contractors across Canada who are looking to establish their first facility.

The program is an excellent opportunity for contractors to establish their first relationship with the surety, build a portfolio of bonded work and build their knowledge of how construction surety works.

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) (purchased and operating under Intact)
• 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.

Your bond broker is your main line of communication between you and the bond company. It is their responsibility to help you gather all the relevant information you will need to make an application for bonding as well as keep your file updated and your Bond Facility in good standing.

1. Reviews your financial statements and help you understand what bond limits you qualify for.
2. Understands what information is required to satisfy the bond company.
3. Prepares a submission to a bond company to qualify for bonding.
4. Negotiates with the bond company with respect to rates, bond limits and indemnity required.
5. Knows the marketplace and understands what terms are reasonable and competitive.
6. Works with your accountant to help you increase your bond limits as needed.
7. Has strong relationships with multiple bond companies providing you options if there is a need to switch bond companies.
8. Prepares and executes bonds and helps calculate the cost of your bonding.
9. Understands construction and acts as a consultant in many situations.

We often work with contractors that don’t frequently use bonding but need it for one small construction project. In today’s market place, it has never been easier to obtain bonding for these types of situations. With automation and access to information, bond companies are better able to assess the credit worthiness of a contractor.

Small and simple one-off bond requirements can usually be done relatively easy through bond company’s online portals. The information required to submit an application is much simpler and the qualification criteria is based on personal and business credit. This is a big shift as bonding used to be an arduous process regardless of the size of the bond required.

It’s possible to get a performance bond with bad credit, but it will depend on the size of the contract and severity of your credit issues. Recently bond companies that specialize in higher risk bonds have emerged. If approved, the rates charged may be higher than normal and collateral security is sometimes required.

It is in these situations where a properly trained surety bond broker is essential. Credit issues are a red flag on your previous history of payments, and viewed as a higher likelihood of default on the contract or an inability to pay sub-contractors and suppliers.

In the event that the contractor fails to perform its obligation under the contract, the owner may make a claim under the performance bond. If the claim is founded, the bond company will then assume the responsibilities of the contract as per the terms and conditions of the contract. In the event of a default, the bond company may:

• Complete the contract involving the original contractor by providing any required financial, management or technical support.
• Re-tender to a new contractor and pay for the cost of completion in excess of the contract price.
• Pay to the owner the total amount of the bond.
• The bond company will look to you for repayment after a claim under the terms of the Indemnity Agreement.

A key difference between bonding and insurance is that in the event of a paid claim, the bond company will look to you to reimburse them. Essentially, an indemnity agreement is an agreement between the contractor and the surety bond company which says that in the event of a paid claim on a contract surety bond, the contractor will reimburse the bond company for the amount of the loss plus any other expenses incurred from the default.

Any and all bond facilities are written with indemnity agreements in place. The indemnity can be corporate, personal by the shareholders and sometimes spouses of the shareholders will be required to indemnify. The surety companies will generally try to have as much indemnity as possible. It is the broker’s role to ensure that a reasonable indemnity is ultimately executed.

A Performance Bond can be required by an owner when the two parties enter into a construction contract. The performance bond guarantees the execution of the contract including scope of work, schedule, site conditions and so on and so forth. A performance bond may also be referred to as a contract bond as it guarantees the performance of the contract.