Dealing with Surety Companies on Construction Contracts

(This document should be read in conjunction with Real Property Contracting (RPC) Best Practice Statemen—"A Primer on Surety Bonds in Federal Construction Contracts") 

There is a need for project managers to follow standard guidelines to ensure that the obligations of the Surety are exercised in those rare instances where Public Services and Procurement Canada (PSPC) declares the construction contractor to be in default of their contract, or bidding issues arise, or subcontractor claims are received.

Surety bonds furnished by the contractor provide protection to PSPC as Obligee and to the claimants in cases of default by contractors starting from the tendering process, through contract default, to payments of subcontractor claims. Construction contracts generally require default protection in the event that a contractor does not perform according to the contract. PSPC pays for this protection, as this cost is built into the contractor's bid. Surety companies that are members of the Surety Association of Canada usually provide this protection in the form of performance bonds and labour & material payment bonds, signed jointly by the principal (contractor) and the bonding company (Surety), referencing the contract between the Obligee (PWGSC/PSPC) and the contractor. Traditionally, bonds are issued in the amount of fifty percent (50%) each for performance and labour & material payment. There are four types of bonds presently utilized by PSPC, as follows:

Bid Bond (Format as prescribed by Treasury Board)
The bid bond is provided by the Surety through the contractor to guarantee the sincerity of a contractor to enter a contract at its bid price. The provision of a bid bond does not, by itself, guarantee the performance of the contract by the contractor. It may be used to cover losses to PSPC for those cases where a contractor is the low bidder and withdraws its tender or refuses to provide contract security.
Performance Bond (Format as prescribed by Treasury Board)
This bond is a bond given by the Surety to the contractor as the Principal naming PSPC as the Obligee to guarantee the performance (completion) of a contract in accordance with its terms and conditions.
Labour & Material Payment Bond (Format as prescribed by Treasury Board)
This bond is given by the Surety to the contractor as the Principal naming PSPC as the Obligee and guarantees payment for labour furnished or materials supplied in connection with a contract awarded to that contractor. It provides protection to claimants as defined in the bond, typically subcontractors/suppliers/sub-sub-contractors who have not received payment for labour and material utilized in the execution of the contract. The notice of such claims must be received by the Surety and the contractor within ninety (90) days from the date the payment was due and may be in amounts up to the value of the bond.
Claimant's Payment Bond (Format as prescribed by Treasury Board)
This bond is given by the Surety to the contractor and is used mainly as an alternative to withholding "earned but unpaid" monies from contractor's progress claim for those cases where PSPC has received notices of claims from claimants. A claimant's payment bond protects registered claimants by ensuring that funds are available to them in the event the contractor refuses or is unable to pay. Normally this form of bond is not required when a labour and material payment bond has been provided by the contractor.

Ensuring Surety Obligations are Exercised

In cases of default by a contractor, project managers must work in conjunction with RPC, Legal Services and the Surety to complete the project. Timing for the involvement of parties is at the discretion of the project manager but should begin if non-performance/ non-payment continues following an initial request for remedial action (warning letters, e-mails, facsimiles, etc.). Other factors to be considered are health and safety, economic and environmental consequences etc. of the non performance/non payment. In order to ensure that the Surety obligations are not compromised, PSPC must exercise the following obligations through the project manager:

Guidelines for the Use of Bonds

Bid Bonds

The maximum liability of the Surety for a bid bond is $250,000, as stipulated in the General Instructions to Tenderers. Project managers should never waive the requirement for the provision of a performance bond by the successful tenderer simply because it has demonstrated financial and technical qualifications by its ability to obtain a bid bond.

When to forfeit a Bid Bond

When to not forfeit a Bid Bond

Performance bonds

Project managers should advise the Surety of all major changes in the scope of the work during the course of the contract and take the following actions as applicable.

Preliminary Actions

Declaration of Default or Six-day Notice

Remedial Action by PSPC to Preserve and Protect the Work

Directing the Surety to complete the work

Limitation period

Liability not accepted by the Surety

It has been agreed that any earned but unpaid monies owed to the defaulting contractor will be released to the Surety upon receipt of a written request and a fully executed Limited Indemnification Agreement. The earned but unpaid referred to herein do not include the contractual holdback (5%) stipulated in the Terms of Payment. That is retained until the issuance of the Interim Certificate of Completion. It is also agreed that if there are lawful claims against these earned but unpaid monies in excess of the amount released to the Surety, it has the option of returning the amount to PSPC who will then be responsible for its distribution as may be directed by the courts, etc.

Labour and material payment bonds

Project managers have three primary roles in the resolution of non-payment issues: direct the contractor to resolve the issue, direct the Surety to resolve the issue in cases where the contractor fails to do so and direct the claimants to register their claims with the Surety.

Standard course of action

Limitation period

Claimant's Payment Bonds

Although used rarely, project managers should be aware that these bonds provide an alternative in the resolution of non-payment issues.

Claimant's Payment Bonds can be utilized

Advantages of Claimant Payment Bonds

Sample Claiment's Payment Bond


Bond Posted as Security Pursuant to the Contract Documents.

KNOW ALL PERSONS BY THESE PRESENTS, That as Principal, hereinafter called the Principal, and as Surety, hereinafter called the Surety, are, subject to the conditions hereinafter contained, held and firmly bound unto as Obligee, hereinafter called the Crown, in the amount of Dollars ($), lawful money of Canada, for the payment of which sum, well and truly to be made, the Principal and the Surety bind themselves, their heirs, executors, administrators, successors and assigns, jointly and severally, or, where this bond is subject to the law of the Province of Quebec, as solidary debtors, and firmly by these presents.

SIGNED AND SEALED this day of 20

WHEREAS, the principal has entered into a Contract with the Crown, dated the day of 20 for

AND WHEREAS, the Crown has notified the Principal in writing of its intention to withhold contract funds, pursuant to Clause GC5 of the Contract for the following claim(s) registered against the Contract:

Date of Notification
Claimant Amount

NOW, THEREFORE, THE CONDITION OF THIS OBLIGATION is such that this Bond stands in lieu of and as security for the release to the Principal of funds which otherwise would have been withheld by the Crown, by reason of Clause GC5 of the Contract on account of the aforementioned claim(s).

To the intent and condition that if the Principal shall pay or cause to be paid the said claim(s) as the Principal may be directed by the Crown to pay, which claim(s) otherwise the Crown would have been entitled to pay by reason of Clause GC5 of the Contract, then this obligation shall be void, otherwise it shall remain in full force and effect.

The Crown may sue on this Bond, have the right to prosecute the suit to final judgment for such sum or sums as may be due and have execution thereon; and such right of the Crown is assigned by virtue of Part VIII of the Financial Administration Act to each such aforementioned claimant.

Provided that, no suit or action shall be instituted by the Crown or its assignees herein against the Surety, unless the claimant(s) shall have commenced the proceedings to determine the right to payment pursuant to Clause GC5 of the Contract within one year from the date of notification.

Provided further that:

  1. the amount of this Bond shall be reduced by and to the extent of any payment or payments made in good faith hereunder
  2. the Surety shall not be liable for a greater sum than the total amount specified in this Bond

IN WITNESS WHEREOF these presents have been executed by the Principal under its hands and seal and by the Surety by its seal and by the signature of its Attorney this day of 20.

SIGNED, SEALED AND DELIVERED in the presence of:




Note: Affix Corporate seal if applicable

Date modified: