Alberta’s construction industry is a significant contributor to the province’s economy. In 2021, it employed approximately 222,200 individuals, which accounts for about 10% of the province’s total employment (according to the federal government). The latest data from the Business Council of Alberta from 2018 and 2019 estimates the industry added about $24 billion to Alberta’s economy in those years, representing 7% of the provincial GDP. At the time there were about 52,000 construction firms operating within the province.
These figures highlight the construction sector’s vital role in Alberta’s economic landscape. However, it is a volatile industry where just about anything can happen, such as project delays due to extreme weather, budget overruns from changes to the project’s scope, defective workmanship leading to costly repairs or replacements, and lengthy contract disputes, all of which can place a construction project in peril. This is why those in the industry need to be cognizant of their being fully covered in case of any event. And that’s where construction surety bonds come in.
A surety bond is a three-party agreement ensuring one party (the principal) fulfills obligations to another (the obligee), with the surety providing financial backing if the principal fails to meet their commitments. Sureties are entities, typically insurance companies or specialized bonding firms, that provide a financial guarantee in a surety bond. They promise to compensate the obligee if the principal fails to meet contractual or legal obligations.
Construction bonds is a general umbrella term referring to various surety bonds used in the construction process. They support the overall integrity of construction undertakings by covering financial risks related to contract breaches, delays, or failure to perform. The main types are performance bonds, bid bonds, and labour and material bonds, which, together, help ensure the transparency, accountability, and financial security of the project.
Performance bonds
Performance bonds can be very complex. In essence, they protect the obligee from financial losses in the event that the principal fails to perform “as expected” under the terms of the agreed-upon contract between the two parties. A wide range of events can trigger a claim under a performance bond, including:
- The insolvency of the principal
- Refusal to address any structural deficiencies or building code violations
- Failure to complete the project on time
- Refusal to complete the project
Performance bonds guarantee that contractors complete a project as per contract terms, protecting project owners from financial losses due to default.
Bid bonds
Bid bonds come into play during the early phase of a construction project, when contractors are bidding on the job. Many project developers require all contractors submitting bids to have bid bonds, which essentially ensure that the bidding contractor has the resources and ability to perform the job. In effect, bid bonds prevent companies that lack the financial resources, personnel, and technical aplomb to complete the project in question from submitting a bid on it.
Again, bid bonds are subject to a long list of technicalities and loopholes, and you should obtain the advice and assistance of an experienced insurance broker as you navigate your options. If you are a construction contractor, you should be sure you’re properly protected before submitting a bid on any project.
Labour and material bonds
This type of surety bond protects subcontractors and suppliers in the event that the principal fails to pay them, in part or in full, for their labour and materials costs. There are other forms of recourse available for subcontractors and suppliers who find themselves in this position, but surety bonds are one of the most effective protection mechanisms available.
Labour and material bonds must be precisely worded to ensure that suppliers and subcontractors are able to make legitimate claims if the principal fails to honour existing agreements. If you are a subcontractor or supplier and you’re considering this type of bond, be sure that you fully understand its provisions before finalizing the agreement. No two labour and material surety bonds are exactly alike, so be certain that you’re getting the essential coverage you need within the context of your specific business arrangement. Our bonds experts here at Lane’s will be happy to walk you through these steps and answer any questions you may have. That’s the broker advantage.
Lane’s Insurance supports the Alberta construction industry
If you want the protection and peace of mind offered by a construction surety bond, discuss your particular needs with a qualified insurance brokers here at Lane’s. We offer a comprehensive range of surety bonds for all commercial activities. If you have questions, or if you would like to learn more, we invite you to contact us at our Calgary, Banff, Edmonton, and Alberta offices today.
