On occasion we are asked what are the differences between the different types of bonds are. Basically, project owners can request that contractors provide or enter into different types of bonds. Bonds are a method of protecting the project owner. Essentially, bonding is a show of proof that you can comply with the tender contract and you can perform the scope of work as laid out in the tender documents. Please note the bonds below are not considered part of construction cost and the project owner does pay the cost of the bonds to the contractor for providing the bonds.
Below are the type of bonding contracts that can be requested by an owner.
TENDER SECURITY
When a contractor wishes to tender a project, tender bonds form part of the tender. Two documents can be required at the tender stage:
Bid Bond:
The function of a bid bond is to guarantee to the obligee (project owner) that the contractor will enter into a contract with the obligee (project owner) within the time required and to provide the security (Bonds or other forms of security) to secure the performance of the contract. If the contractor fails in the obligation, they are obliged to pay to the obligee (project owner) the difference in money between the amount of his tender and the amount for which the obligee legally contracts with another party up to the face of the Bid Bond amount.
Agreement to Bond:
The function of this document is to outline the type and amount of contract security to be provided to the obligee upon award of the contract i.e. 50% Performance Bond and 50% Labour and Material Payment Bond.
Bid Bonds and Agreements to Bond can be issued by themselves or in conjunction with each other.
CONTRACT SECURITY
Once awarded, the contractor is usually obliged to provide the following, dependent on what was outlined in the tender specifications:
Performance Bond:
The performance bond function is to provide financial protection to the obligee (project owner) up to the amount of the Bond in the event of default on the part of the [Contractor]. This guarantees that the [contractor] will carry out the work as specified in the contract, in the time allotted and at the price agreed upon. If a default occurs, the obligee will receive financial compensation up to the penal sum of the Performance bond. The warranty or maintenance as required on a contract is covered by the Performance bond up to 2 years.
Labour and Material Payment Bond:
The labour and materials payment bond guarantees that all claimants (meaning subcontractors, suppliers etc.) will be paid for labour and materials furnished to the [contractor] for use in the project as described in the Bond.
Maintenance Bond:
The maintenance bond guarantees against defects for a specified period AFTER completion of a contract. It protects against defects and failure in workmanship and the length of bond is up to two years. This type of bond is not often required, and its use is dependent upon the type of contract and who the obligee (project owner) is.
Note: that Performance bonds can be requested by themselves or in conjunction with a Labour and Material Payment bond, however you cannot have a Labour and Material bond on its own, nor will any surety approve the issuance of this bond by itself. It is always accompanied by the Performance bond.
Courtesy of Christina Kontogeorgopoulos of Jones Delaurier Insurance Management Inc. & Surety Association of Canada
By Christopher Sandiford