Part of the Ontario construction contracts guide for owners.
A surety bond is one of the few pieces of project paperwork that only matters when something has gone badly wrong. The contractor has walked off, a key trade hasn't been paid, or the low bidder won't sign. When that day comes, the value of the bond depends almost entirely on decisions the owner made months or years earlier: which bonds to ask for, what they say, and how carefully the owner followed their conditions.
This guide explains the three main construction bonds in Canada, what they protect and what they don't, the bonding rules for public-sector owners in Ontario, and how to make a claim that the surety will actually pay.
How a surety bond works
A construction bond is a three-party arrangement. The principal, usually the contractor, owes the obligations. The obligee, usually the owner, is owed them. The surety, a licensed insurer, issues the bond and guarantees the principal's obligations up to the bond amount.
A bond isn't insurance for the contractor. If the surety pays, it expects to be repaid by the contractor and its owners, who will have given the surety indemnities. That's why sureties vet contractors closely before bonding them: their capital, key people, experience with similar work, the quality of their trades and their current workload. For owners, the fact that a reputable surety will bond a contractor for your project is itself a useful piece of prequalification. It complements, but doesn't replace, your own review. Our guide to prequalifying a general contractor in Ontario covers the rest.
The three bonds owners ask for
Bid bonds are submitted with a tender. If the successful bidder refuses or fails to enter into the contract, the surety compensates the owner for the difference between that bid and the next acceptable bid, up to the bond amount. A bid bond protects the tender process, not the project.
Performance bonds guarantee that the contractor will perform the contract. If the contractor defaults, the surety investigates and, if it confirms the default, chooses how to remedy it.
Labour and material payment bonds guarantee that the contractor's subcontractors and suppliers will be paid. If the contractor doesn't pay them, they can claim directly against the surety. The owner isn't the claimant under this bond, but it benefits: unpaid trades with a bond to claim against are less likely to stop work and more likely to be paid without the owner's holdback being drawn into the fight.
View the data
| Bond | Protects | Called on when | Ontario public-contract minimum |
|---|---|---|---|
| Bid bond | Owner's tender process | Low bidder won't sign the contract | Not set by s. 85.1 |
| Performance bond | Owner, against contractor default | Contractor fails to perform | At least 50% of contract price |
| Labour & material | Subcontractors and suppliers | Contractor doesn't pay its trades | At least 50% of contract price |
Two other bonds come up on Ontario projects. A lien bond is posted in court to vacate a registered lien, replacing the land or holdback as security. And since July 2018, section 22 of the Construction Act allows holdback to be retained in the form of a demand-worded holdback repayment bond in the prescribed form (Form 5), instead of cash. An owner that agrees to that is relying on the surety's credit instead of money in its own account, so the decision deserves care.
Public-sector owners in Ontario: bonds are mandatory
Part XI.1 of the Construction Act makes bonds compulsory on public contracts. Under section 85.1, a contractor entering into a contract with the Crown, a municipality or a broader public sector organization, such as a hospital, school board, university or college, must provide both:
- a labour and material payment bond, and
- a performance bond,
each from an insurer licensed under the Insurance Act and each covering at least 50% of the contract price, unless a different percentage is prescribed. Under O. Reg. 304/18, the requirement applies to public contracts of $500,000 or more. The bonds must be in the prescribed forms (Form 31 for the labour and material payment bond and Form 32 for the performance bond), and the requirement doesn't apply where the contractor is an architect or engineer. Public owners can still require additional security beyond the minimum.
The prescribed payment bond builds in a claims process with fixed response times. As originally prescribed, the surety must acknowledge a claim within three business days, state its position on a subcontractor's claim within set periods measured in business days, and pay undisputed amounts within ten business days of stating its position. Sub-subcontractors with direct contracts are also covered.
Private owners aren't bound by section 85.1, but the statutory forms and the 50% benchmark are a sensible reference point when deciding what to ask for.
Contract forms: where the bond requirement lives
In CCDC 2 (2020), the general conditions no longer require the contractor to provide contract security. The former GC 11.2 provision was moved out of the general conditions to Division 00 of the specifications (Section 00 73 63). If an owner wants bonds, the bid documents and supplementary conditions need to say so: which bonds, what amounts, which form, and when they must be delivered. Leaving it to "the usual" is how owners end up with a bond nobody asked for in writing.
What a performance bond covers, and what it may not
Canadian courts have taken two approaches to the scope of a performance bond. In the narrower view, associated with Lac La Ronge Indian Band v. Dallas Contracting Ltd. (2004 SKCA 109), the surety covers the physical completion of the work but not collateral money obligations such as liquidated damages, delay costs or lost income. In the broader view, from the Ontario Court of Appeal in Whitby Landmark Developments Inc. v. Mollenhauer Construction Ltd. (2003), the surety's obligation can include those collateral obligations where they form part of the contract.
Whatever the scope, the bond amount is a ceiling. When a surety tenders for a completion contractor, its obligation is to fund the cost of completion subject to the bond's face value. Take an illustrative $10 million contract bonded at 50%: the surety's exposure is capped at $5 million. If the contractor defaults early, with most of the work still to do and prices having risen since tender, the cost to finish above the unpaid contract balance can approach or exceed that cap, and the owner carries the rest. That's one reason owners on high-risk projects sometimes ask for more than the 50% public-sector minimum, and why construction contingency still matters on a bonded project. A bond limits the loss from a failed contractor; it doesn't remove it.
The deciding factor is the wording of the bond. Owners who expect a bond to cover delay losses or liquidated damages should make sure it says so, and should get legal advice on the form before tender.
Making a claim that gets paid
When a contractor defaults, a surety typically has four options: remedy the default, complete the contract, obtain bids from other contractors and fund the cost of completion up to the bond amount, or pay the owner and take a release. Tendering for a completion contractor is the option most often pursued.
Claims fail most often on the owner's own conduct. The common problems:
- Late or defective notice. Owners must notify the surety as soon as possible and follow the notice provisions in both the contract and the bond. Late notice can cost the owner recovery of completion costs and collateral amounts.
- Skipping conditions precedent. Some bonds require the owner to formally declare the contractor in default before the surety's obligations arise. A termination letter that doesn't meet the bond's terms can undermine the claim.
- The owner's own failures. An owner that doesn't meet its own obligations under the contract or the bond after a default, such as continuing to pay what's due or co-operating with the surety's completion, puts its recovery at risk.
- Missing the limitation period. Bond wording may set its own deadlines for suing. Where it doesn't, Ontario's Limitations Act, 2002 generally allows two years from when the claim was discovered.
On programs we've supported, the strongest bond claims came from owners who involved the surety early, when performance first slipped, not after termination. Sureties would rather help a struggling contractor finish than take over a project.
What owners should do
- Decide on bonds before tender. Specify bid, performance and payment bonds, amounts and forms in the bid documents. Public owners should confirm the section 85.1 minimums apply and are met.
- Review the bond wording, not just the amount. Check what the performance bond covers, its notice requirements and any conditions precedent. Get legal advice on the form.
- Verify the bonds on receipt. Confirm the surety is licensed, the amounts match the contract and the obligee is named correctly.
- Keep the surety informed when trouble starts. Notify early, in writing, in the way the bond requires.
- Stay out of default yourself. Keep paying certified amounts on time and documenting your own performance while a dispute develops.
The bottom line
A bond is a promise with conditions attached. Owners who choose the right bonds, read the wording and follow the notice requirements usually find the surety a useful partner when a contractor fails. Owners who treat bonds as a box to tick at contract signing often discover their conditions only after the claim has been denied.
Want a second opinion on your bonding requirements or a contractor who's starting to struggle? Book a 30-minute call with Benjamin R. Consulting.
Sources: C. Shamess, Miller Thomson LLP, Construction Bonds: What You Need to Know (2019); Miller Thomson, What are Construction Bonds?; A. O'Brien and J. Little, A Bargain Struck: Surety Bonds under Ontario's New Construction Act (Ontario Bar Association, 2018); C. W. Bois, Miller Thomson LLP, Performance Bonds: What Do They Really Cover?; Global Law Experts, Performance Bonds in Canada (2026); R. Burns, Travelers Guarantee Company of Canada, Surety Bonds for Construction Projects (REMI Network); OAA Practice Tip PT.23.11, CCDC 2 (2020) Overview of Changes; Osler, Introducing CCDC 2 2020 (2021). This article is general information, not legal advice. Get legal advice on your contract and specific circumstances.