How a payment bond protects the project
Owners worry about two failures: the contractor not finishing, and the contractor not paying the people who did the work. The performance bond covers the first. The labour and material payment bond covers the second. Without it, an unpaid subtrade liens the property and the owner ends up paying twice. With it, the claimant has a surety to look to and the owner's title stays clean.
For your client, the payment bond is also a sales tool. Subtrades and suppliers extend better terms to a contractor whose jobs are bonded, because they know they will be paid.
Who can claim on a payment bond
The CCDC 222 form defines a claimant as a party with a direct contract with the principal for labour, material or both used in the bonded contract. First-tier subcontractors and suppliers are the usual claimants. Second-tier parties (a supplier to a subcontractor) may or may not qualify depending on the form and the wording the owner used. The 2024 edition sets out notice requirements and timelines for claimants in more detail, including how long a claimant has to give notice after last supplying to the job. We read the claimant and notice provisions for you when an owner uses a non-standard form.
Payment bond and performance bond together
In Canada the two bonds are twins. Both are usually 50% of the contract value, both are issued at award from the same underwriting file, and the premium is normally quoted for the pair. An owner that requires one and not the other is unusual and worth a question. If you only ever hear a client say "performance bond," assume the payment bond is coming too.
| Performance bond | Labour and material payment bond | |
|---|---|---|
| Protects | The owner | Subtrades and suppliers (and, indirectly, the owner's title) |
| Triggered by | Contractor default on the work | Non-payment for labour or materials |
| Typical amount | 50% (sometimes 100%) | 50% |
| Standard form | CCDC 221 | CCDC 222 |
Prompt payment, adjudication and the payment bond
Ontario's Construction Act now sets payment timelines down the contract chain and a fast adjudication process for payment disputes. Similar rules are in force federally and in several provinces. The payment bond sits beside those rules, not in place of them: a subtrade can pursue prompt payment remedies and still claim on the bond if it is not paid. For your client, that means payment discipline matters more than it used to. A pattern of late payment to trades shows up in the file and in the surety's view of character.
What a claim looks like
A claimant gives written notice within the period the bond sets, states what is owed and for what, and the surety investigates. Legitimate claims for work done and materials supplied are paid, within the bond amount, and the contractor repays the surety under the indemnity agreement. Disputed amounts, back-charges and defective work are sorted out in the investigation. The best outcome for everyone is a contractor that pays its trades on time, which is one of the things the underwriter is trying to predict.
What brokers new to surety get wrong here
- Quoting the performance bond and forgetting the payment bond is required too.
- Assuming the payment bond protects the owner directly. It protects the trades; the owner benefits because liens stay off.
- Missing the notice periods when a subtrade calls asking how to claim. Send them the bond and call us.
- Treating the payment bond as insurance for the contractor. It is a guarantee the contractor repays.
