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The Role of a Surety in Canadian Construction

By: Klaudia Ciasnocha

The construction surety industry plays an important role in supporting Canada’s infrastructure development and economic growth.

A surety performance bond is like insurance for project owners in case a contractor can’t finish the job. If a contractor doesn’t finish their work, the bond will protect the project owner. This ultimately protects tax payer dollars.

Contractors can use this financial tool instead of letters of credit to free up capital for other uses. This means they have more available capital to do what they do best – building for our future.

This article will introduce you to the key players in the surety industry in Canada. Also, it will explain how these individuals impact the product.

Why is the Construction Surety Industry So Important?

Surety bonds serve as a risk management tool in the construction industry. They ensure that Contractors or Subcontractors fulfill the obligations within their contracts. If they do not, a bond, known as a performance bond, will step in to ensure the work is completed. The Performance Bond makes sure that if the contractor fails to complete the project, the bond company will step in to make sure the work is completed.

But, bonds don’t just benefit the project owners. Bonds ensure that they protect sub-trades and suppliers from non-payment for services rendered as well. Contractors typically require a labor and material payment bond in addition to the performance bond mentioned earlier. If a sub-trade or supplier is not paid for legitimate work completed under their contract or PO, they can file a claim with the general contractor’s surety company if the project has bonds in place.

Using bonds instead of letters of credit can also help reduce the need for other capital-intensive forms of security. They are also traditionally cheaper to obtain.

Surety bonds are a generally accepted form of security in Canada for construction projects. For example, Ontario requires bonding for public projects that exceed $500,000.

Which parties are involved in the Canadian surety industry?

The construction surety industry in Canada includes various parties, each with specific roles in the process.

1. Surety Companies (The “Surety”): The surety companies are the ones that underwrite these bonds. They complete a financial, experience and character assessment of these contractors and subcontractors who apply for a bonding facility. The surety bonding company acts as a pre-qualifier, vetting contractors to be financially secure.

2. Surety Bond Brokers: Surety bond brokers help their clients obtain bonding from the surety companies. They are the ones who conduct a preliminary assessment of a contractor, then work with them to build a tailored solution with a surety company. They are also well versed in checking the bond requirements for jobs that contractors want to bid.

A reliable surety broker can assist you in connecting with other financial professionals. They can also provide guidance during disputes and represent your business to the surety company. Additionally, they can offer insights on industry trends.

3. Contractors and Subcontractors (The “Principal”): These are the construction companies that are looking to bid on jobs that require bonds to be provided. When the contractors and subcontractors bid on jobs and submit bonds with their tender submissions or final contracts, they show their financial capacity and commitment to making sure the project will be complete. They work with the surety companies and surety brokers to obtain these bonds.

4. Project Owners (The “Obligee”): These are the owners of the projects Contractors and Subcontractors bid for. There are public sector owners which can include government agencies, municipalities, school boards etc. and then there are private owners such as condo corporations. These owners often times require surety bonds to reduce project risks and protect their investments. Surety bonds for these owners provide assurance that the tendered contract works will be completed according to the specifications that were shown and to agreed-upon terms.

5. Industry Associations and Regulatory Bodies: There are organizations such as the Surety Association of Canada (SAC) that act as regulating authorities. These organizations make sure to oversee and to regulate the whole surety industry, not just construction bonds. They keep the surety industry informed about best practices and ensure they comply with Canadian laws and regulations.

All stakeholders play a pivotal role in the construction surety industry in Canada. They also all share a desire to see infrastructure brought to life across the country in a reliable and sustainable manner. Surety bonds make sure that projects get completed and that all parties involved are able to experience success along the way.

 

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