What is the single best way to protect a substantial construction investment from contractor failure? The answer lies in a construction bond—also known as a surety bond.
A construction bond is a three-party agreement designed to safeguard project owners. In this contract:
-
The contractor (Principal) promises to fulfill their obligations.
-
The project owner (Obligee) requires the bond for protection.
-
The surety (often an insurance company) guarantees completion or compensation if the contractor defaults.
Unlike traditional insurance, a surety bond is not just a payout mechanism. It is a guarantee of performance. If a contractor fails to meet contract standards, the surety must step in—either by completing the project or ensuring it is finished to specifications.
Why Construction Bonds Matter
Construction bonds are required on a project-by-project basis, depending on:
-
Applicable laws
-
Project value
-
Owner requirements
They are mandatory for all federal, provincial, and municipal projects, ensuring that public works are completed without compromise.
Who Needs a Construction Bond?
The contractor is responsible for obtaining and posting the bond. However, the project owner is the party protected by it.
When Do You Need a Construction Bond?
A construction bond is typically required when:
-
A municipality or corporation wants assurance that a project will be completed to standard.
-
A government-funded project is underway (these always require bonding).
While less common in private projects, construction bonds may still be required for certain high-value or high-risk builds.
What Happens If a Project Isn’t Bonded?
Not bonding a project isn’t illegal, but it does increase risk. For example:
-
If a contractor goes bankrupt after spending the project funds but only completes half the work, the owner bears the loss.
-
Without a bond, there is no guarantee of completion or financial protection.
Bonding involves a thorough review of a contractor’s financials, ensuring they are in good condition to complete the project. This process provides owners with confidence that the surety stands behind the contractor.
Common Contractor Default Risks
Contractors face several risks that make construction bonds essential:
Financial Strain: Margins in construction are razor-thin, and poor cash flow management can quickly lead to insolvency.
Contract Disputes: The largest profit margin often comes in the final payment draw. If disputes arise and payments are withheld, contractors may face severe financial stress.
Supply Chain Volatility: Material costs can fluctuate dramatically in short periods, creating unexpected financial challenges.
How to Get a Construction Bond
To secure a construction bond, contractors must demonstrate strong financials that reassure the surety of their ability to complete the project. The best way to access the surety market is through a qualified insurance broker who specializes in bonding.
Not all brokers handle surety bonds, so it’s critical to work with one who understands the market and can guide contractors through the bonding process.
Our team of experts utilize their decades of expertise and leverage their market connections to deliver unbeatable value across many types of coverage. Contact us today for a risk review and discover the advantages of the Buildsure Program.
