Bid Bond vs Performance Bond: What Comes First and Why It Matters
Look, if you’re a contractor in Ontario trying to wrap your head around the whole bonding thing, you’re not alone. I’ve had countless conversations with builders who get tangled up in the bid bond versus performance bond maze. It’s not exactly rocket science, but the timing and requirements can trip you up if you’re not careful.
Here’s the deal: these two bonds serve completely different purposes in your project timeline, and understanding when each kicks in could save you from some pretty awkward conversations with project owners.
Bonds in the Project Pipeline
Think of bonds like a relay race – except instead of passing a baton, you’re moving through different stages of contract security.
The bid bond comes first. This little guy gets issued before you even submit your tender. It’s basically your way of telling the project owner, “Hey, I’m serious about this bid, and if I win, I’ll actually show up with the required performance and payment bonds.” We’re typically talking about 5-10% of your bid value here – not exactly pocket change, but not bank-breaking either.
Then comes the performance bond – the heavy hitter. This one only gets secured after you’ve won the contract (congrats, by the way). It’s your guarantee that you’ll actually complete the work as promised, and it usually covers 100% of the contract value.
I remember working with a contractor last year who thought he could skip the bid bond and jump straight to performance. That conversation with the project owner didn’t go well. The timeline matters here – skip a step, and you might find yourself watching the project go to someone else.
Why Each Bond Matters to Owners
Project owners aren’t asking for these bonds to make your life difficult (though I know it sometimes feels that way). They’ve got legitimate reasons for each one.
With bid bonds, owners are protecting themselves from contractors who submit lowball bids just to see what happens, then disappear when they actually win. According to recent industry data, about 15% of contractors who submit bids without bonds end up withdrawing after winning – leaving owners scrambling to award to the second-lowest bidder at a higher price. That difference? It comes out of the owner’s pocket unless there’s a bid bond to cover it.
Performance bonds are the owner’s insurance policy against you not finishing the job. If something goes sideways – whether it’s financial trouble, scheduling conflicts, or just plain old project mismanagement – the owner has financial support to bring in someone else to complete the work.
We tested this theory with one of our clients who had a contractor bail halfway through a $2M project. The performance bond covered the additional costs to finish with a new contractor, plus some of the delay expenses. Without it? That owner would’ve been looking at serious financial trouble.
Premiums & Qualification Requirements
This is where things get interesting (and where your wallet starts paying attention).
Bid bonds are surprisingly affordable. We’re talking low-cost, often just a nominal flat fee. The underwriting is minimal – basically a credit check and verification that you actually intend to bid on the project. Most surety companies can issue these pretty quickly because the risk is relatively low.
Performance bonds? That’s a different story entirely. Premiums typically range from 0.5% to 3% of the contract value, depending on your company’s financials, the project complexity, and perceived risk. A $1M contract could cost you anywhere from $5,000 to $30,000 in premiums – suddenly that bid bond fee doesn’t seem so bad, right?
The underwriting gets serious here too. Surety companies want to see detailed financial statements, project history, and sometimes even meet with key project personnel. One contractor told me his performance bond application felt like applying for a mortgage – except with more paperwork.
What Triggers a Claim
Here’s where the rubber meets the road – when do these bonds actually get activated?
Bid bond claims happen when you win a contract but then decline to accept the award. Simple as that. The owner gets compensated for the difference between your winning bid and the next lowest bidder, plus any additional costs from the delay. I’ve seen claims range from a few thousand to over $100,000 depending on the project size and bid spread.
Performance bond claims are triggered when there’s confirmed non-performance on your part. This doesn’t mean every little hiccup or delay – we’re talking about serious defaults where it’s clear you can’t or won’t complete the work. The process usually involves formal notices, cure periods, and unfortunately, lawyers.
A client of ours had a performance bond claim activated last year when they ran into severe financial difficulties mid-project. The surety company stepped in, helped find a replacement contractor, and covered the additional completion costs. Messy situation, but the bond did exactly what it was supposed to do.
When You Need Each Bond
The timing requirements are pretty straightforward, but worth getting right:
Bid bonds are mandatory at the tender stage for virtually all public contracts and most major private ones. Some smaller private projects might waive this requirement, but don’t count on it. Think of it as your entry ticket to serious bidding.
Performance bonds become essential once you’ve won the contract. Public projects almost always require them, and private owners are increasingly demanding them too – especially for contracts over $500K. We’ve noticed this trend accelerating over the past few years as owners become more risk-averse.
But here’s something that catches people off guard: some contracts require the performance bond to be in place before you can even start work. Read those contract terms carefully – starting work without the required bonds in place can put you in immediate default.
Smooth Transition from Bid to Performance
This transition is where we see contractors stumble most often. Here’s the process that actually works:
First, request your bid bond early enough to have it in hand before the tender deadline. Last-minute rushing usually means higher costs or missed deadlines.
Second, as soon as you win the contract, activate the performance bond process immediately. Don’t wait – contract timelines are usually tight, and performance bond underwriting takes time.
Third, coordinate the closing of your bid bond with the issuance of your performance bond. At Roughley, we handle this transition for our clients because timing matters. You don’t want gaps in coverage, but you also don’t want to pay for overlapping bonds unnecessarily.
One contractor we work with learned this lesson the hard way when they waited three weeks after contract award to start their performance bond application. The project owner wasn’t amused, and the contractor ended up paying rush fees to meet the deadline.
Fast Answers to Common Questions
Do my performance bonds replace the bid bond automatically?
Nope. These are separate instruments that serve different purposes. Your performance bond doesn’t cancel your bid bond – that happens separately once you’re awarded the contract.
Why bid bonds costs so low compared to performance?
Risk and coverage amounts. Bid bonds cover limited exposure (the bid spread), while performance bonds potentially cover the full contract value. The underwriting reflects this difference.
What if contract scope changes after the performance bond is issued?
Good question. Significant changes usually require bond amendments or new bonds entirely. Always notify your broker about scope changes – surprises aren’t fun for anyone.
Can limited credit history affect my bonding options?
Absolutely. But it’s not necessarily a deal-breaker. We work with contractors to build bonding capacity over time, starting with smaller projects and building track records.
Your Bonding Checklist
Want to avoid the headaches? Here’s your game plan:
- Confirm bid bond requirements in tender documents before you start preparing your bid
- Request quotes from us before you need them – rushing costs money and creates stress
- On winning, activate your performance bond process immediately (seriously, same day if possible)
- Keep your financial statements current and ready – performance bond underwriting moves faster with prepared documentation
The contractors who nail this process are the ones who plan ahead and communicate early. The ones who struggle? They’re usually trying to figure things out after they’ve already won the contract.
Ready to Step Up Your Game?
Look, bonding doesn’t have to be complicated, but it does need to be done right. The difference between contractors who grow and those who stay stuck often comes down to understanding these fundamentals.
Secure your bid, win the contract, and start construction on time. Connect with Roughley Insurance Brokers to arrange your bid and performance bonds – so you can focus on what you do best: building.
We’ve helped hundreds of Ontario contractors navigate this process, and we’re here to make sure you don’t become a cautionary tale. Schedule a call with our team or check out our other bonding guides on our website to keep building your knowledge.
Disclaimer: This article provides general information about surety bonds in Ontario. Always consult with qualified professionals for specific legal or financial advice related to your projects.
