Performance Bond vs Labour and Material Bond: What Ontario Contractors Need to Know
Look, if you’re running a construction business in Ontario, you’ve probably heard these terms thrown around at bid meetings or in contract documents. Performance bonds, labour and material bonds – they sound important, but honestly? Most contractors we talk to aren’t 100% clear on what each one actually does.
And I get it. Bond terminology can feel like legal gibberish sometimes.
Here’s the thing though: understanding these two types of bonds could be the difference between landing that big municipal contract and watching someone else walk away with it. We’ve worked with hundreds of Ontario contractors over the years, and the ones who get bonding right? They’re usually the ones growing their businesses year over year.
Who Each Bond Actually Protects (And Why It Matters to You)
This is where things get interesting – and where a lot of contractors get confused.
Performance bonds are all about the project owner. Think of them as insurance for whoever hired you. If you can’t finish the job (whether that’s because of financial trouble, poor performance, or any other reason), the performance bond guarantees they’ll get their project completed. The surety company steps in to either find someone else to finish the work or pays out the claim.
Labour and material bonds? Totally different story. These protect your subcontractors and suppliers when you can’t pay them. Say your electrical sub finishes their portion of a $200K job, but you hit a cash flow crunch and can’t cut their cheque. That labour and material bond ensures they still get paid.
We had a client last year – decent-sized GC doing mostly commercial work – who learned this the hard way. They thought their performance bond covered everything. When a supplier claim came in for $45K worth of materials, they were shocked to discover their performance bond wouldn’t touch it. That’s a labour and material bond issue, not a performance bond issue.
The key thing to remember: performance bonds protect your clients, labour and material bonds protect the people who work for you.
Coverage Limits: What You’re Actually Getting
Performance bonds typically cover the full contract value. Working on a $500K renovation? Your performance bond will likely be for that full amount. Makes sense – if you walk away halfway through, the owner needs enough coverage to get someone else to finish what you started (and fix any problems you might have created).
Labour and material bonds usually run somewhere between 50% to 100% of your contract value. Why the range? Because not every dollar of your contract goes to labour and materials – some goes to your overhead, profit, equipment costs, that sort of thing. The actual percentage depends on your project type and what the owner requires.
But here’s something most contractors don’t realize: these percentages aren’t just random numbers. According to Statistics Canada, labour and materials typically account for about 65-75% of total construction costs in Ontario. So when someone requires a 100% labour and material bond on a $1M project, they’re being extra cautious.
One quick note (because this comes up a lot): having a higher coverage limit doesn’t automatically mean higher premiums. Your rates are based more on your financial strength and track record than the actual coverage amount.
How Risk Management Actually Works
This is where performance bonds and labour/material bonds operate completely differently.
Performance bonds are proactive. The surety company digs into your financials before issuing the bond, looks at your project history, checks your bonding capacity. They might even monitor larger projects as they progress. Why? Because they want to catch problems early, before they become expensive claims.
Labour and material bonds? They’re reactive. The surety isn’t watching your project day-to-day or tracking whether you’re paying your subs on time. The bond only kicks in after someone files a claim saying you didn’t pay them.
We’ve seen this play out differently for different contractors. One of our clients – a mechanical contractor doing mostly industrial work – had his surety actually help him restructure a problematic project before it became a performance bond claim. The surety’s project manager spotted some red flags in the monthly reports and connected our client with additional project management resources.
On the flip side, labour and material bonds don’t offer that kind of support. If you’re struggling to pay your subs, the surety won’t know until those subs start filing claims.
Claims: When Things Go Sideways
Performance bond claims usually start when the project owner sends a formal notice of default. Maybe you’ve fallen behind schedule, or there are quality issues, or – worst case – you’ve stopped showing up to the jobsite entirely.
Once that notice hits, the surety investigates. They’ll look at the contract, check the project status, maybe bring in their own consultants to assess what’s actually needed. Then they decide: do they help you fix the problem, find another contractor to complete the work, or just cut a cheque to the owner?
Labour and material bond claims work differently. Your sub or supplier has about 120 days from their last day of work (or final material delivery) to file a claim. After that, they’ve got roughly one year to take legal action if the claim isn’t resolved.
Here’s what’s tricky: even if your performance bond pays out, labour and material claims can still come in later. We’ve seen contractors think they’re in the clear after a performance bond claim, only to get hit with supplier claims months afterward.
When You Need Both Bonds (Spoiler: It’s More Often Than You Think)
Most public projects in Ontario require both bonds. The Ontario New Home Warranties Plan Act, municipal contracts, federal projects – they typically want both performance and labour/material bonds.
Why both? Because they solve different problems. The performance bond ensures the building gets finished. The labour and material bond ensures the people who built it get paid. From a project owner’s perspective, both are important.
But even on private projects, you might see both bonds required. We’ve noticed this trend especially on larger commercial projects where the owner wants comprehensive protection.
Bundling both bonds together often makes sense from a cost perspective too. Most sureties offer better rates when you’re getting multiple bonds from them, and it simplifies the application process.
The Money Talk: What Bonds Actually Cost
Bond premiums typically range from 0.5% to 3% of the bond amount, depending on your financials and experience. Performance bonds and labour/material bonds are usually priced similarly, though labour/material bonds can sometimes be slightly cheaper.
Your rate depends on several factors:
- Your company’s financial strength (working capital, net worth, etc.)
- Your industry experience and track record
- The specific project type and complexity
- Your relationship with the surety
We’ve seen new contractors pay 2-3% for their first bonds, while established contractors with strong financials might pay under 1%. The key is building that track record and maintaining solid financial statements.
One thing to keep in mind: qualification criteria are similar for both bond types. If you can qualify for one, you can probably qualify for the other.
Matching Bonds to Your Projects
Every project is different, but here are some general guidelines we use:
You definitely need performance bonds when:
- The project owner specifically requires them (obviously)
- You’re bidding public work
- The contract value is significant relative to your company size
- There’s complex technical work or tight deadlines
Labour and material bonds make sense when:
- You’re using lots of subcontractors
- Material costs are a big chunk of the project
- Your payment terms with subs are longer than usual
- The project owner requests them
Both bonds together are common on:
- Municipal and government projects
- Large commercial developments
- Projects where you’re working with new or unfamiliar subcontractors
Quick Answers to Questions We Hear All the Time
Can my subs make claims under both bonds?
No. Subcontractors and suppliers can only claim under the labour and material bond. The performance bond is strictly between you, the surety, and the project owner.
How long after project completion can claims be filed?
For performance bonds, it depends on your contract terms – often 1-2 years for defects and warranties. For labour/material bonds, claimants typically have 120 days from last work to file, then one year to pursue legal action.
Is it cheaper to get both bonds together?
Usually, yes. Most sureties offer package pricing, and you’re dealing with one application process instead of two.
What can I do to get better bond rates?
Maintain strong financials, build a solid project track record, work with an experienced bond broker (like us), and consider building relationships with multiple sureties.
Getting Your Bonds Sorted
Here’s your action plan:
First, review any upcoming project requirements carefully. Don’t wait until the last minute – bond applications can take days or weeks, especially for larger amounts or if you’re new to bonding.
Second, get your financial documents organized. You’ll need recent financial statements, work-in-progress schedules, and probably a list of your key subcontractors.
Third, talk to someone who knows Ontario bonding requirements. Each surety has different appetites for different project types and contractor profiles.
Ready to protect your projects and your people? Contact Roughley Insurance Brokers today to discuss your performance and labour & material bond needs. We’ll help you navigate the requirements, find competitive rates, and get you set up for success on your next big project.
Because at the end of the day, bonds aren’t just about meeting contract requirements – they’re about building the kind of business that can take on bigger, better projects with confidence.
