What the performance bond promises
The bond does not insure the project. It guarantees the contractor's obligations under the contract. If the owner declares the contractor in default and has met its own obligations, the surety investigates and, if the default is confirmed, chooses how to respond: finance the original contractor to finish, bring in a replacement contractor, tender the remaining work, or pay the owner the cost to complete, all within the bond amount. The 2024 CCDC 221 form sets out the owner's notice steps and the surety's response timelines in more detail than the old form did.
Whatever the surety pays, the contractor and its indemnitors owe back. That is why the underwriting before the bond is issued is the whole game.
50% or 100%
Canadian practice is a performance bond at 50% of the contract value, paired with a 50% labour and material payment bond. Some owners, lenders and US-style contracts require 100%. The percentage sits in the contract documents and changes the premium and the capacity the job uses. Flag a 100% requirement early; it affects how much other bonded work the contractor can carry at the same time.
Who requires it
- Public owners. Ontario's Construction Act requires it on public contracts of $500,000 and up. Municipalities, school boards, hospitals, Crown corporations and other public bodies across Canada require it by tender.
- Private owners and developers. Common on larger builds and on any job where the owner wants completion protected.
- Lenders. Construction lenders often make a performance bond a condition of financing.
- General contractors. GCs bond their key subtrades to protect their own schedule and their own bond.
- Non-construction buyers. Supply, service, technology and transportation contracts carry performance bonds too. These files often need a market that understands work that does not look like a building.
What the underwriter is deciding
Three questions. Capital: does the balance sheet carry this job and the rest of the backlog? Capacity: has the contractor completed work of this size and type before, with this team? Character: does the track record show finished jobs, paid trades and no pattern of disputes? The work-in-progress schedule is read closely, because it shows how much the contractor already has on its plate. The largest completed project is compared with the one to be bonded. A tenfold jump is a hard conversation; a step up is normal.
If something goes wrong on the job
A performance bond claim starts with the owner's written notice of default. The surety has the right to investigate before it acts, and the owner has to have held up its end: payments made, the contract administered properly. Brokers should know two things. First, a claim does not mean an automatic payout. Second, the contractor remains liable to the surety for whatever is paid. Early calls help. If your client's job is in trouble, tell us before the owner does.
Maintenance and warranty periods
Many performance bonds carry the contractor's obligations through the warranty period defined in the contract, commonly one year after substantial performance. Some owners want a separate maintenance bond for a longer period. The contract documents say which. See the construction bonds guide for where maintenance bonds fit.
