Bid Bond vs Performance Bond: How They Work Together on Ontario Construction Projects

A bid bond gets you through the door. A performance bond keeps you accountable once you're inside. These two surety instruments work in sequence on virtually every bonded construction project in Ontario, yet contractors routinely confuse them, underestimate the transition between them, or discover too late that they can't secure the second after winning a tender with the first.

Here is the practical breakdown: what each bond does, what it costs, when Ontario law makes them mandatory, and how to manage the handoff so a contract award doesn't turn into a scramble.

What a Bid Bond Actually Does

A bid bond is a guarantee submitted with your tender. It tells the project owner that you are bidding in good faith, that you intend to sign the contract if selected, and that your surety company has pre-approved you for the performance and payment bonds specified in the tender documents.

The standard form in Canada is the CCDC 220 bid bond, updated in 2024. It involves three parties:

• Principal: the contractor submitting the bid
• Obligee: the project owner receiving the bid
• Surety: the bonding company backing the contractor's commitment

If you win the contract and then refuse to sign or cannot provide the required bonds, the owner makes a claim against your bid bond. The payout is the lesser of two amounts: the bond penalty (typically 10% of your bid price) or the actual difference between your bid and the next lowest compliant bid.

Example: You bid $1.2 million on a municipal project. The next lowest bid is $1.27 million. You win but cannot proceed. The owner claims against your bid bond and recovers $70,000, which is the spread between the two bids, well within the 10% bond penalty of $120,000.

The Consent of Surety

Most tender documents also require a consent of surety (sometimes called an agreement to bond). This companion document confirms that your surety company has reviewed the project and is willing to issue the performance and labour and material payment bonds if you are awarded the contract. It is essentially the surety's pre-approval letter, and it gives the owner confidence that the bonding transition will happen smoothly after award.

Without a consent of surety, your tender may be declared non-compliant and rejected before it is even evaluated.

What a Performance Bond Actually Does

A performance bond is issued after contract award. It guarantees the project owner that you will complete the work according to the contract terms. If you default, meaning you abandon the project, become insolvent, or materially fail to perform, the surety steps in.

The standard Canadian form is the CCDC 221 performance bond, also updated in 2024 with significantly more detailed claims provisions than its 2002 predecessor.

When a valid claim is triggered, the surety typically has several options:

1. Finance the original contractor to cure the default and complete the work
2. Arrange a replacement contractor to finish the project under a new agreement
3. Tender the remaining work competitively and oversee completion
4. Pay the bond penalty to the obligee (the least common outcome)

The surety investigates every claim before acting. The owner must formally declare the contractor in default in writing, and the owner must have fulfilled their own contractual obligations, including timely payments, before the surety's obligation is triggered.

Performance Bond vs Labour and Material Payment Bond

Performance bonds are almost always issued alongside a labour and material payment bond (CCDC 222). While a performance bond protects the project owner against contractor default, the payment bond protects subcontractors, suppliers, and labourers against non-payment by the general contractor.

These are companion instruments. In Ontario, public contracts that require bonding must include both. They are priced and issued together.

Ontario's Mandatory Bonding Requirements

Section 85.1 of the Ontario Construction Act (formerly the Construction Lien Act, amended by Bill 142 in 2017) makes surety bonds mandatory on public contracts above a specific threshold:

• Applies to: contracts where the owner is the Crown, a municipality, or a broader public sector organization (hospitals, universities, school boards, and similar entities)
• Threshold: contract price of $500,000 or more
• Minimum coverage: both a performance bond and a labour and material payment bond with coverage limits of at least 50% of the contract price
• Bond form: must comply with prescribed Form 32 under the Act
• Excludes: contracts where the contractor is an architect or engineer

Owners can require more than the minimum. Many municipalities and provincial agencies specify 100% performance bonds and 100% payment bonds on larger projects. The 50% floor is the legal minimum, not the market standard.

For contracts under $100 million, the minimum bond coverage is 50% of the contract price. For contracts at or above $100 million, the minimum is capped at $50 million per bond.

What Each Bond Costs

The cost difference between bid bonds and performance bonds is significant, and understanding why helps explain the surety's risk calculation.

Bid Bond Pricing

Bid bonds are typically issued at no additional cost or a nominal flat fee once a contractor has an approved bonding facility with a surety company. The premium is negligible because the surety's exposure is limited. The bond only pays out the bid spread (the difference between the winning bid and the next compliant bid), capped at the bond penalty.

The real cost of a bid bond is the underwriting required to establish the bonding relationship in the first place: financial statements, bank references, work-in-progress schedules, and corporate indemnity agreements.

Performance Bond Pricing

Performance bond premiums are calculated as a rate per $1,000 of the contract price and vary based on coverage level, project size, and contractor risk profile:

• 50% performance bond: approximately $7 per $1,000 of contract value (roughly 0.7%)
• 100% performance bond: approximately $10-$15 per $1,000 of contract value (roughly 1.0% to 1.5%)

On a $2 million contract, a 50% performance bond might cost around $7,000 in premium. A 100% performance bond on the same contract could run $20,000 to $30,000. These figures include the companion payment bond, which is typically priced together.

Premiums are influenced by the contractor's financial strength, experience with similar projects, current work-in-progress load, and claims history. Contractors with strong balance sheets and clean track records pay rates at the low end of the range.

Side-by-Side Comparison

| Feature | Bid Bond | Performance Bond | |---|---|---| | When issued | Before tender submission | After contract award | | Standard form | CCDC 220 (2024) | CCDC 221 (2024) | | Coverage amount | Typically 10% of bid price | 50% or 100% of contract price | | Who is protected | Project owner (obligee) | Project owner (obligee) | | Claim trigger | Contractor refuses to sign contract or cannot provide required bonds | Contractor defaults on contract performance | | Maximum payout | Lesser of bond penalty or bid spread | Up to the full penal sum of the bond | | Typical cost | Nominal or no charge (once bonding facility established) | 0.7% to 1.5% of contract value | | Companion bond | Consent of surety | Labour and material payment bond |

The Indemnity Agreement: What Backs Every Bond

One detail that surprises many contractors: surety bonds are not insurance. They are a form of credit. Every bonding program requires a General Agreement of Indemnity (GAI), signed before any bonds are issued.

The GAI requires the contracting company and its principal owners (typically anyone holding 10% or more equity, and often their spouses) to personally indemnify the surety. If the surety pays a claim on your performance bond, the surety will pursue recovery from your company and the personal guarantors.

This is why surety underwriting focuses heavily on the contractor's financial capacity. The surety is extending credit, not absorbing risk. The indemnity agreement ensures there is recourse if a bond is called.

Managing the Transition from Bid to Performance

The handoff between bid bond and performance bond is where contractors most often stumble. A smooth transition depends on preparation:

Before you bid:

• Confirm your bonding facility has sufficient capacity for the project
• Obtain the bid bond and consent of surety well before the tender deadline
• Review the tender documents for specific bonding requirements (coverage percentage, bond form, timeline for bond delivery)

Immediately after award:

• Notify your surety broker the same day you receive the award letter
• Provide the executed contract, any addenda, and the project schedule
• The surety will finalize underwriting and issue the performance and payment bonds

Common pitfalls:

• Waiting weeks after award to start the performance bond process, then facing rush fees or missed deadlines
• Bidding on a project without confirming that your surety will bond that specific contract type or size
• Assuming the consent of surety guarantees bond issuance regardless of contract changes. Material changes to scope or price after tender may require re-approval

The bid bond is typically released once the contract is executed and the performance bond is delivered. These are separate instruments with separate timelines. One does not automatically convert into the other.

Building Your Bonding Capacity

Bonding capacity is not fixed. Surety companies reassess it regularly based on your company's evolving financial picture. Contractors who want to pursue larger bonded projects should focus on:

• Clean financial statements: audited or review-engagement statements prepared by a CPA carry more weight than internally prepared financials
• Working capital: the surety looks at current assets minus current liabilities as a primary indicator of capacity
• Work-in-progress discipline: completing projects on time and on budget builds your track record
• Banking relationships: a strong line of credit and positive banking references support your application
• Claims-free history: every bond claim makes future bonding harder and more expensive

Many contractors start with small bonded projects in the $100,000 to $500,000 range and build capacity over several years to qualify for multi-million-dollar performance bonds.

Talk to a Surety Broker

Bid bonds and performance bonds are foundational to construction procurement in Ontario. Whether you are pursuing your first bonded tender or managing a growing portfolio of bonded work, the right surety broker makes the process predictable.

At Roughley Insurance, we work with Ontario's leading surety markets to secure bid bonds, performance bonds, and labour and material payment bonds for contractors across the province. If you are preparing for a bonded tender, start your application today or call our team at (905) 576-7770 to discuss your bonding needs.

This article provides general information about surety bonds in Ontario and does not constitute legal or financial advice. Consult a qualified professional for guidance specific to your situation.