Everything You Need to Know About An Agreement to Bond
Author: Jamie Collum
If you are a contractor bidding on municipal projects than you have likely come across a requirement for an Agreement to Bond and/or a Bid Bond in the tender specifications. These documents can be requested for any size contract but generally speaking we see these requirements in place for most tenders that have a budget of $500,000 or more.
To understand what an agreement to bond is, we must first step back to understand the term surety or surety bonds.
A surety is a company that takes the responsibility for the debt, default or other responsibilities of another party. In the construction world, a surety is a company that takes the responsibility, or in other words, guarantees, the performance and often payment obligations of a contractor. In layman terms, the surety company is the bond issuer for its clients, the contractors.
Example: Contractor XYZ and the City of Metropia
Let’s use an example to better understand this concept.
Contractor XYZ has entered into a $1M contract with the City of Metropia, the project owner, to build a new pedestrian bridge in Rouge Park. The City is concerned about their funds and wants to ensure that the $1M investment is protected. As such they require Contractor XYZ to provide them with construction surety bonds, namely a Performance Bond and a Labour & Material Payment Bond.
The performance bond guarantees the contractual obligations of the Contractor (ie. building the bridge as required per the design specifications and contract).
The L&M bond provides payment insurance or protection for all of the sub-contractors and suppliers on the job. This means that if Contractor XYZ fails to pay a sub trade or supplier funds that are rightfully owed then the sub trade or supplier can make a claim against the L&M bond rather than suing the city.
Thus by requiring the Performance and L&M bonds, the City is ensuring that both the contract will be completed as required and that all sub trades and suppliers will be paid thus protecting their $1M investment.
Tendering Public Jobs
But let’s back up a step. How can the City of Metropia be certain that Contractor XYZ will be able to provide these bonds if awarded the contract?
This is where the Agreement to Bond comes into effect. At the time of bidding or tendering the contract to the City, it is outlined in the tender documents that an Agreement to Bond document must be provided by the contractor. Failure to provide this document would result in a non-compliant bid. As agreement to bond is a legally binding document that commits the surety to issuing the contract bonds if the contract is awarded the contract.
Here is the common verbiage you will find in a tender document:
Agreement to Bond
The Bidder is to complete Schedule “F” Agreement to Bond and upload it to the electronic submission. Bidders are required to submit the following with their bid:
- An Agreement to Bond to provide a Performance Bond surety for one-hundred percent (100%) of the CONTRACT AMOUNT;
- An Agreement to Bond to provide a Labour & Materials Payment Bond surety for one-hundred percent (100%) of the CONTRACT AMOUNT;
The Agreement to Bond to provide a Performance Bond and the Agreement to Bond to provide a Labour and Materials Payment Bond must be valid for minimum of ninety (90) days) after the closing date of this Bid Document.
All bonds shall be provide from a surety company authorized to do business in Ontario.
Note: An Agreement to Bond can have a few different names as follows:
- Undertaking to Bond
- Surety’s Consent Letter
- Consent of Surety Letter
Municipal owners may also require a Bid Bond at the tender stage. To learn more about Bid Bonds click here.
There is another document called a Surety Pre-qualification Letter which is often required at the pre-tender stage to pre-qualify for bid lists. We commonly see this required by municipalities and school boards early in the tendering season.
Who are the Surety Companies authorized to do business in Canada?
In Canada, there are currently multiple bond companies offering surety bond facilities for contractors:
- Trisura Guarantee
- Intact Surety
- Guarantee Company of North America (was purchased by Intact Surety in December 2019)
- The Hartford
- Economical Insurance
- Aviva Canada
- Zurich Canada
- Travelers Guarantee
- Sovereign Insurance
- Liberty Mutual Insurance Company
- Western Surety
- Berkley Surety
- Northbridge Insurance
- United Surety
Is Insurance the same as Surety?
You may now be thinking, ‘great I have my insurance with Intact so I will just ask them for an Agreement to Bond’. Unfortunately it is not that simple.
First off, while may insurance companies do offer surety divisions as well, these departments tend to be walled off from each other and do not likely communicate between divisions. These means that just because you have insurance with one of these companies, does not necessarily result in them also wanting to provide you with construction surety. These are very different risks from an insurance companies’ perspective.
How do contractors apply for an Agreement to Bond?
To receive an Agreement to Bond, a contractor must first establish a surety bond facility for their business. In order to so, you must first speak with a licensed and experienced surety broker. While there are close to 40,000 licensed insurance brokers across Canada, the vast majority do not understand or specialize in surety.
On the other hand, the number that truly understand and specialize in surety is likely less than 100 brokers across Canada. Thankfully if you are reading this blog you are in the right place.
FCA is a very specialized brokerage with an incomparable knowledge of the construction industry and surety bonds. In fact, our whole team of surety experts are former surety bonding executives who used to work on the company side of the business. This means that we know the ins and outs of the industry and we know how to get things done quickly.
How long does it take to apply? We have a tender closing in 48 hours.
If you have a tender closing in 48 hours (or less), you have to come to the right place. Give us a call right away and we can get the process started for you so you are able to win this tender and also the next ones too!