Bonding

Question 1

What is a Construction Surety Bond?

Answer 1

A construction surety bond is a three party instrument under which the Surety joins with the contractor (Principal) to guarantee to the owner (Obligee), that the contractor will comply with the terms and conditions of the contract.

Question 2

What is the difference between Insurance and Bonding?

Answer 2

Insurance:

• Two party agreement
• insurance liability is direct
• Premium calculated based on predicted losses
• Cancelable by either party

Bonding:

• Three party agreement
• Surety’s liability is secondary
• Bond premium for credit facility
• Remains in effect until principal obligation performed

Question 3

What are the three parties in a Bonding relationship?

Answer 3

• Obligee (Owner)
• Principal (Contractor)
• Surety (Bonding Company)

Question 4

What is the Principal’s role in Bonding?

Answer 4

The Principal (Contractor) furnishes the bond

Question 5

What is the Obligee’s role in Bonding?

Answer 5

The Obligee (Owner) receives the guarantee promised by the bond

Question 6

What is the Surety’s role in Bonding?

Answer 6

• Financial Institution
• Posseses great wealth and stability
• Is the entity that furnishes the guarantee that the bond promises

Question 7

What is a Guarantee?

Answer 7

The Surety underwriting the performance of the Contractor

Question 8

What is a Penal Sum?

Answer 8

The upper limit of the Surety’s potential financial liability to the Owner

Question 9

What is a Premium?

Answer 9

The fee that the Principal (Contractor) pays to the Surety in exchange for providing the guarantee to the Obligee

Question 10

What is an Indemnitor?

Answer 10

A person or entity who promises to pay the Surety back for any cost that the Surety incurs if called to make good the guarantee

Question 11

What are the 3 types of Bonds?

Answer 11

• Bid Bond
• Performance Bond
• Labour & Material Payment Bond

Question 12

What is a Bid Bond?

Answer 12

An assurance that the bidding contractor who is awarded the contract will accept and sign it, and will furnish all insurance policies and additional surety bonds required by the bid documents.

Question 13

What amount is the Bid Bond % in Canada?

Answer 13

Typically 10% of Bid Price

Question 14

What is “Consent of Surety”?

Answer 14

A two party agreement where if the Contractor enters the contract, the Surety will provide the performance and labour and material bond

Question 15

What is a Performance Bond?

Answer 15

An Assurance provided to Owners that once they have awarded the contract, the Contractor will perform according to the contract’s terms.

Question 16

What is the typical amount of the Performance Bond in Canada?

Answer 16

50% of the Contract

Question 17

Who guarantees the Performance Bond?

Answer 17

The Surety promises to fulfill the Contractor’s obligations to perform the contract made with the Owner if the Contractor is unwilling or unable to perform.

Question 18

What and how much is the Labour and Material Payment Bond?

Answer 18

A bond (guaranteed by the Surety) to private owners who want to avoid having to sell property to satisfy liens or legal claims filed by subcontractors or suppliers.
Usually 50% of the Contract Price

Question 19

What is an Indemnity Agreement?

Answer 19

The separate contract between the Surety and the Contractor which outlines their price and guarantee.
The owner never sees this contract directly.

Question 20

How much is a Bid Bond Premium?

Answer 20

$750+ per year