What is a Performance Bond?

Let’s start form the basics

A Performance bond also known as a contract bond is given after the job is awarded to the lowest bidder. The bid bond is replaced by a performance bond which ensures that the contractor must complete the project or job in Canada. Also, the contractor must obey all the terms and conditions and you must obey them otherwise, there are penalties. Performance bonds are commonly used in the construction industry because the developer requires a guaranty from the contractors that they will value that work and not go leave the work unattended before it is finished.




The Benefits of Performance Bonds:

1. A letter of credit (LOC) is given to the owner which means that if there is a problem with the contractor, that letter would provide the money to fix the problems. It provides you the money but not a completed project.

2. Provides the owner with the peace that even with if there is a problem with the contractor, the project will successfully complete the terms and conditions provided in the original contract.

3. The performance bond provides full protection of the amount loss. The owner is not responsible for any deductibles or any other payments. The owner must find a new contractor to complete the project.

What an Owner can do Before a default:

The owner can make a formal claim but that could only be done if the default or the problem by the contractor is declared. The owner should not wait for things to get worse before they call the surety company. As the owner comes across performance issues that could lead to defaults, immediately they should inform the bonding company.


A few ways the Surety can prevent the defaults:

1. They provide assistance to solve the problems

2. Contacting and meeting the parties and informing about the issues the owner has been facing

3. Lastly, they could help find solution by implementing and adjusting the contracts that would convince the owner and allow the contractor to continue with the project


Making a Claim Under a Performance Bond:

To make a claim under the performance bond, there are 3 conditions that should be met:

1. The owner or also known as the obligee must write a letter formally mentioning the bonded contractor who is also known as the principle is in default under the contracts terms and conditions

2. The contractors must be in default by the terms and conditions

3. The owner should have satisfied their obligations under the contract.


If these conditions are met, this gives four options to the surety:

1. Remedy – Means that the surety will fix the situation and try to convince the owner to take back the default and allow the contractor to continue with the project

2. Complete – The surety company could use the formal contract with the owner to finish the contracts obligation given by the contract

3. Arrange for Completion – the surety could find a replacement contractor to finish the contractor’s obligations. They can make another completion contract between the owner and the new contractor.

4. Payout – the surety is intended to pay the sum of the money to the owner which is:

  • The additional cost to complete the project or the amount of the bond