Construction Bonding – What Canadian Contractors Need To Know
The Canadian construction industry has been booming in the past few years. More and more projects have popped up throughout the country and many companies have been able to strike it rich during the process. Of course, it is essential for investors to protect their interests when working with construction projects. They need protection from disruptions, insolvency, and project shutdowns. This is where construction bonding enters the picture. Whether you’re an investor or a Canadian contractor, you’ll want to learn everything you can about construction bonds. Once you have, you will know precisely how these bonds work, who they protect, and how to acquire the bonds you need.
Some of this information will be explored in greater depth below.
What Is Construction Bonding?
First and foremost, it would be wise to familiarize yourself with the basic concept of the construction bond. It is actually a type of surety bond, which is used within the construction industry. The bond works very similar to other types of surety bonds. Within the arrangement, three parties are involved. One is the construction contractor, one is the investor, and the last member is the provider of the bond. The bond helps to keep the contractor in check, while insuring they get the job done in a sufficient period of time and in a satisfactory manner. It also helps to keep the investor or developer protected throughout the duration of the project.
What Could Go Wrong?
As a construction contractor within the beautiful country of Canada, you should be familiar with the volatility within the construction industry. Many days, things are absolutely perfect. However, problems can arise at the drop of a hat. A construction company may become insolvent and could be forced out of business. This would put the construction project in peril. On the other hand, there are some construction companies, which are simply unable to live up to their expectations. These groups will leave the developer with a bad taste in their mouth. And finally, there may be disruptions, which prevent the project from getting completed on schedule.
Each and every one of these problems could cause serious financial harm to everyone involved. It could prevent the developer from getting the property to the client on time. On the other hand, it may stop the supplier from getting paid for their services. The construction bond will help to protect these individuals from all potential problems.
All bonds involve two or more parties. All parties involved in a specific development project will be responsible for making sure that everything goes as planned. A construction bond will protect the obligee or project owner from monetary loss, in the event that the contractor fails to meet the terms of the contractual agreement. However, the contractor the one that is responsible for obtaining the construction bond. A surety company also has a major responsibility in this process. It is the surety’s responsibility to ensure all project owners that the principal or contractor is capable of meeting the contract specifications.
There are many risks associated with a development project and the larger the project, the higher the risks. Construction bonding plays a huge role in redistributing the risks between all parties involved.
Types Of Bonds
Although construction bonds are similar, it is vital to remember that there are different classifications of such. There is performance, payment, and bid bonds. They all work in correlation with one another to project third parties, but they’re all different to some degree. Below, you’ll find a quick breakdown of each type of construction bond, so you’ll know how they work.
- Bid Bond – This is the first bond that will be encountered during a construction project. The construction contractor will need to acquire a bid bond, before they’ll be allowed to legally submit their bid to the developer. The bid bond makes it certain that the contractor will be willing and capable of acquiring the subsequent bonds should they win the rights to the project.
- Performance Bond – The performance bond is truly the most important for the project developer. This bond helps to guarantee a good performance from the contractor. The bond will help to ensure that the contractor or principal will get the job done on time and in accordance with the guidelines set forth in the contract. If the principal is unable to fulfill their obligations, they’ll be required to pass on the contract to another company or pay the costs to have the project completed.
- Payment Bond – The payment bond is used for the benefit of subcontractors and supplies. It helps to ensure that these entities will receive the payment they are owed at the agreed upon time. If these groups do not receive their payments in full, the bond will give them a clear path to cover the losses.
Although these are three of the most common construction bonds, there are truly many more. Not all bonds are required for each and every project. By carefully analyzing your specific situation and the risks involved, you will easily be able to determine which bonds are needed and which are not.
Other Types Of Bonds
As mentioned above, there are many other types of bonds, which are commonly utilized in the construction industry. Some of these may be required, but others are simply unnecessary. This is something you will need to determine on your own, when examining your current situation. Below, you’ll discover a few other types of construction bonds and their purposes.
- Maintenance Bond – The maintenance bond is very similar to the performance bond, but it is slightly different as well. This bond goes beyond the initial project and protects the client for a lengthier period of time. The maintenance bond is used to protect the owner from defects in the material, design, and workmanship for a specific duration, after the project has concluded. In this sense, the maintenance bond can easily be considered a warranty of sorts.
- Supply Bond – As the name implies, the supply bond is directly related to the supplies used for the project at hand. The supply bond is put in place to protect the supplier and the contractor. It guarantees that the supplier will provide the contract with the supplies they need to complete the project, while guaranteeing the supplier gets paid in full for those materials. The supply bond has no impact on the labor whatsoever.
- Labor Bond – The labor bond is utilized when the contractor is forced to contract out some of the work. The bond will help to protect the labor provider and provide them with the reassurance that they’ll be paid for their time and energy.
How To Get Approved
As mentioned above, sureties are responsible for making sure the contractor is capable of fulfilling their end of the bargain. The pre-application process is quite extensive, but the first step is to complete and submit the associated surety application. The next step will be to undergo an extensive background check, with an admission of a credit report. The surety company will expect the applicant to have a high credit score, but this is not always a requirement. However, the applicant must not have any unsettled lawsuits or claims lingering over them.
The applicant must submit a copy of their financial records, professional references, business license, and the project plan, along with the application. This data will aid in keeping the process speeding along, so there is no need for any delay. Once your complete all the necessary steps, you will only need to sit back and wait for the surety to make a decision on whether or not to approve your application.
Don’t Neglect Your Credit
There are many contractors, who are simply unaware of the fact that their personal credit plays a major role in their ability to acquire a construction bond. When attempting to acquire construction bonding, you will be judged based on a handful of factors, including your personal credit. Some brokers will be willing to work with those with bad credit. However, you may be required to pay substantially more, in order to get what is needed. In many situations, especially for smaller projects, your rate and eligibility will be determined by your personal credit only.
For bigger projects, more factors will be taken into consideration. This could include your company’s current financial situation and its part performance. Still, even for bigger projects, your personal credit score will be considered. Therefore, it is absolutely vital to maintain a good credit score, so you can get the bonds you need at a favorable rate.