Surety Bonds in Ontario, Canada

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A surety bond is a legally binding financial guarantee — provided by a surety company — that a contractor, business, or individual will fulfill a specific contractual or regulatory obligation. Unlike insurance, which transfers risk from the insured to the insurer, a surety bond creates a three-party guarantee where the contractor (the principal) is expected to perform, the surety guarantees that performance to the obligee, and — critically — the contractor remains ultimately responsible to repay the surety for any valid bond claim paid on their behalf. Boardwalk Insurance helps Ontario contractors and businesses access surety bonds from 30+ A-rated carriers. Serving all provinces except Quebec.

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What Is a Surety Bond?

A surety bond is a three-party contractual guarantee:

The Principal is the contractor or business that must perform an obligation (complete a construction project, comply with a licence, pay its subcontractors)
The Obligee is the party requiring the guarantee — a government body, project owner, or licensing authority
The Surety is the insurance or bonding company that provides the financial guarantee to the obligee that the principal will perform

If the principal fails to fulfill the bonded obligation, the obligee can make a claim against the bond. The surety investigates the claim and, if valid, compensates the obligee up to the bond amount. The principal is then obligated to repay the surety for the claim paid — this is the fundamental difference between a surety bond and insurance.

Surety bonds are not insurance for the principal. They are a financial guarantee to the obligee. The principal's obligation to perform is not discharged by the surety's payment — it is transferred from the obligee to the surety, who pursues recovery from the principal.

Types of Surety Bonds in Canada

Bid Bonds

A bid bond accompanies a contractor's tender submission on a construction project. It guarantees that if the contractor is awarded the contract, they will enter into the contract at the bid price and provide the required performance and payment bonds. If the contractor refuses to honor a winning bid, the bid bond compensates the project owner for the difference between the original bid and the next acceptable bid, up to the bid bond amount.

Bid bonds are almost universally required on public sector tenders in Canada. Government agencies at the federal, provincial, and municipal levels require bid bonds — typically 10% of the bid value — before accepting a contractor's tender submission. Many large private commercial project owners also require bid bonds.

Performance Bonds

A performance bond guarantees that the contractor will complete the project to contract specifications and within the contract timeline. If the contractor defaults — abandons the project, becomes insolvent, or fails to perform to specifications — the surety must either: arrange for the project to be completed by another contractor, pay the project owner the cost to complete, or reach another resolution acceptable to the project owner.

Performance bonds are required on virtually all major public sector construction contracts in Canada, and on most institutional and large commercial private sector projects. Standard performance bond amounts are 50% or 100% of the contract value.

Labour and Material Payment Bonds

A Labour and Material Payment Bond guarantees that the contractor will pay all subcontractors, suppliers, and workers employed on the project. This bond protects the supply chain — it ensures that trades and material suppliers will be paid even if the general contractor becomes insolvent or fails to pay. Payment bonds are typically required alongside performance bonds on major public and commercial projects.

Payment bonds are particularly important for subcontractors and suppliers, who can make a claim against the payment bond if the general contractor does not pay them. This protection is separate from the Construction Act's holdback provisions, which address lien rights.

Maintenance Bonds

A Maintenance Bond guarantees that the contractor's work will remain free of defects for a specified period after project completion — typically one to two years. It provides the project owner with financial recourse if construction defects emerge in the post-completion period. Maintenance bonds are common on public infrastructure projects and are sometimes required on large commercial private sector projects.

Licence and Permit Bonds

Licence bonds are required by regulatory bodies and government agencies as a condition of issuing licences or permits to certain businesses and contractors. Common examples in Ontario include:

Motor vehicle dealer bonds required by OMVIC (Ontario Motor Vehicle Industry Council)
Mortgage broker bonds required by FSRA (Financial Services Regulatory Authority of Ontario)
Contractor licence bonds required by certain municipalities

Licence bonds protect consumers and the public from financial loss caused by the licensed business's failure to comply with applicable regulations or to fulfill obligations arising from their licensed activities.

How Surety Bonds Differ from Insurance

This distinction is critical and frequently misunderstood:

Feature	Surety Bond	Insurance
Purpose	Guarantee of performance to obligee	Risk transfer to insurer
Parties	Three: Principal, Surety, Obligee	Two: Insured and Insurer
Principal's obligation after claim	Must repay surety	No repayment obligation
Risk bearer	Principal (contractor)	Insurer
Underwriting basis	Financial strength, creditworthiness, track record	Statistical loss experience
Premium	Guarantee fee (low % of bond amount)	Risk-based premium

The surety's primary underwriting question is not "what is the statistical probability of a claim?" — it is "is this contractor capable of performing this contract?" Surety underwriting is based on the contractor's financial statements, credit history, project track record, management experience, and technical capacity. A contractor with strong finances and a solid track record obtains bonds easily and at low cost; a contractor with weak finances, prior defaults, or inadequate experience will find surety difficult or impossible to obtain.

Surety Bonding Capacity: How It Is Determined

A contractor's bonding capacity — the maximum aggregate value of bonded work the surety will support at any one time — is determined through financial underwriting of the contractor's balance sheet. Key factors:

Working Capital: Net current assets (current assets minus current liabilities). Surety companies typically support bonding capacity of approximately 10 to 20 times a contractor's working capital.

Net Worth: Total equity in the business. A contractor with $500,000 in working capital and $1 million in net worth will have materially more bonding capacity than one with $500,000 in working capital and $200,000 in net worth.

Completed Project History: Demonstrated ability to complete projects of similar scale and complexity. A contractor bidding their first $10 million project without a track record of similar-scale completions will face significant surety scrutiny.

Banking Relationships and Credit: The strength of the contractor's bank line of credit and banking relationship provides the surety with both a financial indicator and an alternative liquidity source in the event of project difficulties.

Financial Statements: Surety underwriters require current, CPA-reviewed or audited financial statements. Contractors who cannot produce reliable financial statements will find bonding difficult regardless of their underlying financial position.

Frequently Asked Questions About Surety Bonds in Ontario

What is the difference between a surety bond and a letter of credit?

Both surety bonds and letters of credit are financial guarantees, but they work differently. A letter of credit is a bank instrument where the bank holds collateral — typically cash or a secured credit line equal to the letter of credit amount — and will pay the obligee on demand. A surety bond does not require the contractor to post collateral; instead, it is based on the surety's assessment of the contractor's financial strength and capacity. Surety bonds are typically less expensive than letters of credit because they do not tie up the contractor's capital as collateral.

Is a surety bond the same as insurance?

No. A surety bond is a financial guarantee, not insurance. Under insurance, the insurer absorbs the loss and the insured has no repayment obligation. Under a surety bond, the surety pays a valid claim to the obligee, but the principal (the contractor) must repay the surety for the amount paid. The premium for a surety bond is a guarantee fee for the surety's credit support, not a risk premium for absorbing losses.

What financial documents do I need to get bonded?

Surety underwriters typically require: current year and two to three prior years of financial statements (CPA-reviewed or audited for larger bond amounts); a current interim financial statement; a bank reference and confirmation of the contractor's credit facility; a completed bonding application with work-in-progress schedule; and a list of completed projects with values and references. For smaller bond amounts and licence bonds, less documentation may be required.

How much does a surety bond cost?

Surety bond premiums are typically expressed as a percentage of the bond amount — the guarantee fee. For construction bonds (bid, performance, payment), rates typically range from 0.5% to 3% of the bond amount, depending on the contractor's financial strength, the project type, and market conditions. A $1 million performance bond for a financially strong contractor might cost $7,500 to $15,000. Licence bonds are typically written at flat annual premiums of a few hundred dollars to a few thousand dollars depending on the bond amount required.

Do I need both a performance bond and a payment bond?

Most public sector construction contracts in Canada require both a performance bond and a labour and material payment bond. These serve different purposes: the performance bond protects the project owner against contractor default; the payment bond protects subcontractors and suppliers against non-payment by the general contractor. They are typically priced and issued together, with the combined premium slightly less than two separate bonds.

Why Ontario Contractors Choose Boardwalk Insurance for Surety Bonds

Boardwalk Insurance is a RIBO-registered commercial insurance broker and a division of Oracle RMS. We place surety bonds for contractors across Ontario and Canada — from single-project bonds for emerging contractors to multi-project programs for established general contractors with significant annual bonded volumes. We work with surety markets including Intact, Aviva, Travelers, and specialty surety underwriters.

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