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Surety Insurance
4 min read

Contract Surety Bonds: A Key Player in the Realization of Construction Projects

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General and Civil Engineering Contractors

What is a Contract Surety Bond and who are the Parties Involved?

The contract bond is a three-party agreement between:

  • The surety (represented in Quebec by an insurer);
  • The creditor, i.e. the client, also known as the prime contractor or beneficiary (for example, a municipality, a public or parapublic organization, a ministry such as that of Transport, etc.);
  • The principal debtor, i.e. the general contractor selected to carry out the contract.

Under this agreement, the surety guarantees to the creditor that the general contractor will carry out a mandate in accordance with the contractual provisions that bind them. In the case of a subcontractor, the general contractor becomes the beneficiary. 
With a surety bond, the surety undertakes to pay the obligee's debt if the obligor fails to meet its legal obligations. 

What is the Difference Between Bonding and Insurance?

On the one hand, a surety contract always brings together the three parties mentioned above. An insurance contract, on the other hand, brings together the insurer, the insured, the policyholder and the beneficiary. On the other hand, a surety bond is permanent, whereas an insurance policy can be cancelled.
Finally, while insurance is analyzed on the basis of probabilities, using actuarial calculations, surety bonds are analyzed on the basis of a debtor's ability to fulfill a contract. It therefore includes both financial and qualitative elements.
The 3Cs of surety bonding are often mentioned in connection with general contractors:

  • Character: Here, the general contractor must enjoy a solid reputation and demonstrate probity in all situations. A spirit of cooperation, integrity and transparency are attributes he must possess;
  • Competence (technical capacity): He must prove that he is competent enough to complete the project entrusted to him. For example, he can point to his employees' experience, expertise, training and previous achievements;
  • Capital: Here, he must prove that he has sufficient monetary leverage to bring the project to fruition.
Why do you Need a Contract Surety Bond?

It provides complete protection under three types of surety bonds:

  • Contract: Guarantees that the work will be carried out in accordance with the contractual standards;
  • Bid: Guarantees that the bidding organization undertakes to carry out the work if selected;
  • Payment, pledges, materials: Guarantees payment of sums due to workers and suppliers who have entered into agreements with the general contractor to carry out the work.

To demonstrate the relevance of a contract bond, let's look at a real-life case where an electrician and a university have both benefited from it. As the work progressed, the electrician realized that the initial estimate contained several errors. In addition, a number of unforeseen events beyond his control occurred during the course of the work, resulting in delays. He unsuccessfully proposed a revised schedule to the company. Faced with the impasse, he asked the guarantor to intervene. After studying the case, the surety ruled in favor of the electrician, and the educational institution had to increase the initial amounts, but did not have to deal with a neglected site.