Contract surety bonds play an important role in Alberta’s construction industry. Whether you are a general contractor bidding on a public project or a subcontractor working on a major commercial development, it’s more than likely that bonding will be a requirement. Contract surety bonds provide protection for project owners while helping contractors show their ability to meet their contractual obligations.
The most common types of contract surety bonds are bid bonds, performance bonds, and labour and material payment bonds. Contractors bidding on construction projects in Calgary or elsewhere in Alberta may be asked for both performance bonds and labour and material payment bonds. For example, Alberta Infrastructure’s contract-security specifications identify performance bonds and labour and material payment bonds as forms of contract security. Both are types of contract surety bonds, however they serve different purposes.
Understanding the difference can help you determine what a project owner is asking for and why both types of bonds may be required. That is where the experts at Lane’s Insurance come in. As insurance brokers, we work for you, not the insurance companies, and our employees have extensive experience with helping Alberta businesses grow while also being protected from liability and risk.
What is a performance bond?
A performance bond provides protection to the project owner for such as a contractor not fulfilling the obligations of their construction contract. Simply put, it provides the project owner with financial security that the work being contracted will be performed according to terms. If the contractor defaults on their agreement, the surety (AKA the bonding company) may have obligations under the bond to respond.
For example, for certain provincial projects, Alberta’s contract documents specify the use of the Canadian Construction Documents Committee’s standard performance bond, which are particularly important for larger construction projects where the owner could face substantial costs and delays if a contractor is unable to complete the work.
Being able to obtain the required performance bond can be an important part of qualifying for projects.
What is a labour and material payment bond?
A labour and material payment bond, sometimes called an L&M bond, takes care of the possibility that people or businesses providing labour, materials, equipment, or certain services for a project are not paid.
A scenario may be if a general contractor hires several subcontractors and purchases materials from multiple suppliers. If the contractor fails to pay the amounts owing, claimants may have rights under the payment bond, subject to the bond’s terms.
The Alberta government labour and material payment bond form’s definition of labour and materials includes labour, equipment, materials, and services used, or reasonably required, for the contract. It also establishes how qualifying unpaid claimants may pursue a claim against the bond.
The important difference is that a performance bond is mainly concerned with the contractor’s performance of the contract, while the labour and material payment bond addresses proper payment for labour, materials and other project expenses.
What does this mean for Calgary contractors?
If you are bidding on a project that requires bonding, don’t wait until you have won the contract to start thinking about your surety requirements.
The bond requirements should be reviewed as part of the tender process. Lane’s insurance brokers pay close attention to the required bond type, amount, wording, deadlines, and any other conditions specified by the project owner.
Your broker can also help you understand what information the surety will require and work with you to establish bonding capacity before you need it.
Surety bonds are not the same as insurance
One important point for contractors is that surety bonds are different from conventional insurance policies.
With insurance, the insurer generally assumes a specified risk in exchange for a premium. A surety arrangement involves three parties: the contractor or principal, the project owner or obligee, and the surety.
The surety provides a guarantee subject to the terms of the bond. If the surety responds to a valid claim, the contractor remains responsible for the underlying obligation.
This is one reason establishing a relationship with a surety through a broker and maintaining strong financial records is vitally important as your construction business grows.
Lane’s insurance brokers support Alberta’s contractors
Insurance brokers play a key role in navigating all aspects of surety bonding. We act as the intermediary between contractors and surety companies, helping to present your business in the strongest possible light to those providing the bonding. From advising on financial documentation to securing timely approvals, brokers help streamline the process and avoid costly delays.
In addition to contract surety bonds, we also provide small surety bonds.
Beyond finding the right surety company for you, we also provide ongoing support as your business grows. We can help adjust your bonding limits as needed, assist with renewals, and offer guidance on contract requirements, in addition to providing a complete suite of business insurance options. Contact us at our Calgary, Banff, Edmonton, or greater Alberta offices to see what we can do for you.
