Types of Construction Bonds in Canada: What Contractors and Project Owners Need to Know

Every year, billions of dollars in Canadian construction projects are secured by surety bonds. In Ontario alone, any public sector contract worth $500,000 or more legally requires both a performance bond and a labour & material payment bond — a rule that has been in effect since July 2018 under section 85.1 of the Construction Act. If you are a contractor bidding on government work, bonding is not optional. If you are a project owner, understanding bonds is the single best way to protect your investment.

Yet construction bonds remain one of the most misunderstood tools in the industry. Many contractors confuse them with insurance. Many project owners are unsure which bonds to require and why. This guide covers the major bond types used across Canada, Ontario's mandatory bonding rules, what bonds actually cost, and how to build your bonding capacity as a growing contractor.

How Construction Bonds Work (They Are Not Insurance)

Before diving into bond types, it is important to understand what a construction bond actually is — and what it is not.

A surety bond is a three-party agreement:

• Principal — the contractor who purchases the bond and promises to perform the work
• Obligee — the project owner (or municipality) who is protected by the bond
• Surety — the bonding company that guarantees the contractor's performance

This three-party structure is fundamentally different from insurance. An insurance policy is a two-party contract where the insurer expects to pay claims and prices premiums to cover those expected losses. A surety bond expects zero losses. The surety is essentially vouching for the contractor's ability to perform. If the surety does pay a claim — say the contractor abandons a project — the contractor must reimburse the surety in full. The personal indemnity agreement that contractors sign when obtaining bonds makes this obligation legally binding.

This is why surety underwriting focuses so heavily on the contractor's qualifications rather than just statistical risk. The surety needs to be confident the contractor will actually finish the job.

Bid Bonds: Your Ticket to the Tender Table

A bid bond guarantees that a contractor who submits a bid will honour that bid if selected and will provide the required performance and payment bonds upon contract award.

How they work: When submitting a tender, the contractor includes a bid bond — typically set at 10% of the bid amount under CCDC 220 (the standard Canadian bid bond form). If the contractor wins but refuses to sign the contract, the project owner can claim against the bond to recover the difference between the winning bid and the next lowest qualifying bid, up to the bond's face value.

Why they matter: Bid bonds filter out unqualified bidders. A contractor who cannot obtain a bid bond likely lacks the financial stability or track record to complete the project. For project owners, requiring bid bonds means every bidder has already been pre-qualified by a surety company — a rigorous financial vetting process that no tender evaluation committee could replicate on its own.

Key details:

• Standard amount is 10% of the bid price (CCDC 220), though owners can request 5%–15%
• Usually issued at no additional premium when the contractor has a surety facility in place
• Valid until contract signing, then replaced by performance and payment bonds
• Required on virtually all public sector tenders in Canada

Many tender calls also require a Consent of Surety (sometimes called an Agreement to Bond) submitted alongside the bid bond. This is a letter from the surety confirming that it will issue the required performance and payment bonds if the contractor is awarded the contract. Without this document, a bid can be disqualified regardless of price.

Performance Bonds: Guaranteeing Project Completion

A performance bond guarantees that the contractor will complete the project according to the terms and specifications of the contract.

How they work: If the contractor defaults — whether through abandonment, insolvency, or persistent failure to meet contract standards — the project owner declares the contractor in default and files a claim with the surety. The surety investigates and, if the default is valid, typically exercises one of four options:

1. Finance the contractor to complete the remaining work (if the default was minor or temporary)
2. Arrange completion by working with the owner to select a replacement contractor, with the surety absorbing additional costs
3. Take over the project entirely, managing completion through its own selected contractor
4. Pay out the cost to complete up to the bond limit

Coverage amounts: Under Ontario's Construction Act (Form 32), the minimum coverage for public contracts is 50% of the contract price. Many private owners and some municipalities require 100% coverage. For large P3 (public-private partnership) projects over $100 million, Ontario caps the mandatory bond at $50 million.

The 2024 CCDC update: In May 2024, the Canadian Construction Documents Committee published updated bond forms (CCDC 221 for performance bonds) — the first revision since 2002. The new forms expanded from two pages to seven, adding structured claims procedures with specific timelines: a pre-notice meeting within 7 days, acknowledgement of a claim within 4 business days, and the surety's position within 20 days of receiving notice. These updates brought much-needed clarity to a process that was previously vague.

Labour and Material Payment Bonds: Protecting the Supply Chain

A labour and material payment bond guarantees that the general contractor will pay its subcontractors, suppliers, and workers.

Why they exist: On private projects, unpaid subcontractors can register a construction lien against the property to secure payment. But on public projects — where the owner is the Crown, a municipality, or a broader public sector organization — you cannot register a lien against government property. Crown immunity prevents it. Without payment bonds, subcontractors working on a school, hospital, or highway project would have no practical recourse if the general contractor failed to pay.

This is exactly why Ontario's Construction Act mandates payment bonds (Form 31) alongside performance bonds on public contracts over $500,000.

Coverage: The minimum is 50% of the contract price under Ontario law. The federal government also commonly requires payment bonds on its construction contracts using its own standard form, which covers both first-tier subcontractors and second-tier suppliers.

Claim process: Under the updated CCDC 222 (2024), a subcontractor or supplier must submit a notice of claim within 120 days from the date they last provided labour or materials. The surety must acknowledge the claim within 3 business days and deliver its position within 10–25 business days. A suit limitation period of one year from the date the contractor ceased work typically applies.

Who benefits:

• Subcontractors and suppliers get a guaranteed payment backstop when liens are unavailable
• Project owners avoid work stoppages caused by unpaid trades walking off the job
• General contractors build credibility with their supply chain, making it easier to attract quality subcontractors

Learn more about how these bonds compare in our guide to performance bonds vs. labour & material bonds.

Maintenance Bonds: Post-Completion Protection

A maintenance bond (sometimes called a warranty bond) guarantees that the contractor will return to repair defects discovered after the project is substantially complete.

Coverage period: Typically one to two years following project completion. The bond amount usually ranges from 2% to 10% of the total contract value, with larger or more complex projects (bridges, water treatment plants, major road work) requiring higher percentages.

What they cover: Latent defects — problems not visible at the time of project acceptance that surface later. Structural settling, waterproofing failures, HVAC system deficiencies, and material degradation are common examples. If the contractor refuses to honour their warranty obligations, the project owner can claim against the maintenance bond to fund the necessary repairs.

Important distinction: Modern CCDC performance bond forms already include a maintenance/warranty provision as standard. A standalone maintenance bond is most commonly required on municipal infrastructure projects where the warranty period extends beyond the performance bond's coverage, or where the owner wants dedicated security for the warranty period.

Subdivision and Site Improvement Bonds

These bonds serve a different purpose than the contract bonds above. Rather than guaranteeing a contractor's work, they guarantee a developer's obligations to a municipality.

Subdivision bonds ensure that a developer building a new residential, commercial, or mixed-use subdivision will complete all required public infrastructure — roads, sidewalks, storm sewers, water mains, streetlights — to municipal standards before lots are sold or occupied. If the developer fails to complete the infrastructure, the municipality can claim the bond and hire another contractor to finish the work.

Site improvement bonds serve a similar function for renovation, retrofit, or improvement projects on existing properties. They guarantee that approved site alterations will be completed to code.

Both bond types are increasingly accepted by Canadian municipalities as an alternative to letters of credit, which tie up the developer's banking capacity. Bond amounts typically range from 50% to 150% of the estimated infrastructure costs, and coverage usually extends one to two years past completion to account for seasonal conditions.

Ontario's Mandatory Bonding Rules

Ontario is one of only two provinces (alongside New Brunswick) with statutory bonding requirements for public construction contracts. Here is what you need to know:

The rule: Under section 85.1 of the Construction Act (effective for contracts procured after July 1, 2018), any public sector contract with a price of $500,000 or more requires the contractor to provide:

• A performance bond (Form 32) covering at least 50% of the contract price
• A labour & material payment bond (Form 31) covering at least 50% of the contract price

Who counts as "public sector": The Crown, municipalities, and any broader public sector organization — which the Act defines broadly to include every authority, board, commission, corporation, council, foundation, or organization that received public funds in the previous fiscal year. This captures hospitals, school boards, transit agencies, universities, and more.

Exceptions: Contracts where the contractor is an architect or engineer are excluded. P3/AFP (alternative financing and procurement) projects over $100 million have a cap of $50 million per bond rather than the standard 50% calculation.

Bond forms: The bonds must use the prescribed Ontario forms (Form 31 and Form 32), and the surety issuing them must be registered under the Insurance Act.

What Construction Bonds Cost

Bond premiums are driven by the contractor's risk profile and the project specifics:

| Factor | Lower Premium | Higher Premium | |--------|--------------|----------------| | Contractor experience | 10+ years, proven track record | New or limited history | | Financial strength | Strong working capital, low debt | Thin margins, high leverage | | Credit history | Clean personal and corporate credit | Past defaults or poor credit | | Project complexity | Straightforward scope | Unusual or high-risk work |

Typical ranges:

• Bid bonds: Often included at no additional charge when issued as part of a bonding facility
• Performance and payment bonds: 0.5%–3% of the contract value (well-qualified contractors commonly pay 0.5%–1.5%)
• Maintenance bonds: Typically a fraction of the performance bond premium
• Subdivision bonds: 1%–3% of the bond amount

On a $2 million contract, a combined performance and payment bond package might cost between $10,000 and $30,000 in premiums for a qualified contractor.

How to Get Bonded: The Qualification Process

Surety underwriting centres on the three Cs:

1. Character — Personal and corporate credit scores, industry reputation, references from past project owners, and the contractor's history of honouring commitments
2. Capacity — Track record of completing projects of similar size and complexity on time and on budget. A contractor who has successfully completed $1 million projects will not immediately qualify for a $10 million bond.
3. Capital — Working capital, net worth, cash reserves, bank lines of credit, and the owner's personal financial position. Most sureties require reviewed or audited corporate financial statements and personal financial statements from each shareholder.

What you will need to provide:

• Two to three years of corporate financial statements (review engagement or audit preferred)
• Personal financial statements and net worth declarations for all owners
• A completed contractor questionnaire covering business history, ownership, and organizational structure
• Work-in-progress schedule and accounts receivable/payable aging
• Bank reference letter

Working with a broker: A surety broker does not just fill out paperwork. An experienced broker understands your financial position, helps you present your company in the strongest light, maintains relationships with multiple surety companies, and matches you with the right surety for your project type and size. This is especially valuable for growing contractors who are pushing into larger projects and need a surety that understands their trajectory.

Once your documentation is submitted, a surety facility can often be approved within 24 to 48 hours for straightforward applications.

Build Your Bonding Capacity Over Time

Bonding capacity is not static. Contractors who want to compete for larger projects need to actively grow their bonding program:

• Maintain clean financial statements — sureties are looking at working capital ratios, debt levels, and profitability trends
• Build gradually — successfully completing bonded projects at your current level is the best evidence you are ready for the next tier
• Communicate proactively — keep your broker informed about upcoming bids, project completions, and any financial changes. Surprises erode trust.
• Invest in your accounting — upgrading from compilation-level statements to review engagements or audits signals professionalism and gives sureties more confidence in your numbers

At Roughley Insurance, we work with contractors across Ontario at every stage of growth — from first-time bonding to established firms managing multi-million-dollar programs. Our surety bonding team can walk you through the qualification process and help you put your best foot forward with the surety market.

Frequently Asked Questions

Are construction bonds mandatory in Ontario?

Yes, for public sector contracts. Under section 85.1 of Ontario's Construction Act, any public contract with a price of $500,000 or more requires the contractor to provide both a performance bond and a labour & material payment bond, each covering at least 50% of the contract price. Private projects are not legally required to use bonds, but many project owners request them voluntarily — especially on high-value contracts.

How much do construction bonds cost in Canada?

Premiums typically range from 0.5% to 3% of the contract value, depending on the bond type, project size, and the contractor's financial strength. A well-established contractor with strong financials and a clean track record will generally pay 0.5%–1.5%. Newer contractors or those with weaker financials may pay 2%–4% or more. Bid bonds are usually included at no extra cost when bundled with performance and payment bonds through a surety facility.

What is the difference between a surety bond and insurance?

A surety bond is a three-party agreement (contractor, project owner, surety company), while insurance is a two-party contract (insured and insurer). Insurance companies expect to pay claims and price premiums accordingly. Surety companies expect zero losses. If a surety pays a claim on a contractor's behalf, the contractor must reimburse the surety in full under their indemnity agreement. Bonds are a pre-qualification and guarantee tool, not a risk-transfer mechanism.

What do surety companies look for when bonding a contractor?

Sureties evaluate the "three Cs": Character (credit history, reputation, references), Capacity (track record completing similar projects), and Capital (working capital, net worth, cash flow, personal financial position of the owners). Most sureties require reviewed or audited corporate financial statements and a personal indemnity from the business owners.

What happens if a bonded contractor defaults on a project?

The project owner declares the contractor in default and files a claim with the surety. After investigating, the surety can finance the original contractor to finish the work, arrange for a replacement contractor, take over the project entirely, or pay out the cost to complete up to the bond limit. The contractor remains liable and must reimburse the surety for any claim amounts paid.

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Roughley Insurance Brokers has been helping Ontario contractors navigate surety bonding since 1945. Whether you need your first bid bond or want to grow an established bonding program, [contact our surety team](/surety/bond-application) to get started.