Surety Bonds

What is a surety bond and how does it work?

A surety bond is a three-party guarantee, not insurance. It involves you, the party you owe an obligation to, and the surety that backs you. If you fail to meet the obligation, the surety satisfies the obligee and then recovers what it paid from you. That recovery right is what makes surety different from insurance.

• Principal: you, the contractor or business that must perform the obligation
• Obligee: the project owner, government, or regulator requiring the bond
• Surety: the company guaranteeing you'll perform
• If you default, the surety makes the obligee whole, then looks to you to repay it
• You sign a General Indemnity Agreement (GIA) before bonds are issued

What does a performance bond cover?

A performance bond (CCDC 221 in Canada) guarantees the project owner that the contract gets finished according to its terms. If the contractor defaults, the surety can step in, finance the original contractor, arrange a replacement to complete the work, or pay the owner up to the bond limit. It protects the owner, not the contractor.

• Guarantees completion of the contract per its terms and specifications
• Commonly written at 50% of the contract price on Alberta public work, up to 100% on private and municipal jobs
• On default, the surety completes, re-tenders, finances, or pays up to the bond amount
• Liability is capped at the bond's penal sum
• Does not cover the owner's consequential or liquidated damages

This is an overview. All coverages, limits, and exclusions can only be confirmed by a licensed MyBrokers broker on a quote tailored to your specific policy.

What does a labour and material payment bond cover?

A labour and material payment bond (CCDC 222) guarantees that your subcontractors and suppliers get paid for the labour and materials they put into the project. It matters most on public work, where trades generally can't register a builders' lien against government property, so the payment bond is their main recourse. It's issued alongside the performance bond, not on its own.

• Protects subcontractors and suppliers who provide labour and materials
• Usually written to match the performance bond, often 50% to 100% of the contract price
• Critical on public projects where liens against Crown property are limited
• Issued as a companion to the performance bond, not as a stand-alone bond
• Covers claimants down one level of subcontractor

This is an overview. All coverages, limits, and exclusions can only be confirmed by a licensed MyBrokers broker on a quote tailored to your specific policy.

Do I need a bid bond to bid on a construction tender?

On most public-sector and larger private tenders, yes. A bid bond (CCDC 220) tells the owner your bid is serious and that you can post the performance and payment bonds if you win. If you withdraw or refuse the contract after being awarded it, the bid bond compensates the owner for the cost of going to the next bidder.

• Typically required at 10% of your bid price
• Guarantees you'll sign the contract and provide contract security if awarded
• Often paired with an Agreement to Bond confirming the surety will issue the contract bonds
• Usually issued at no extra premium once your bonding facility is set up
• Common on municipal, provincial, and federal tenders and larger commercial work

How much does a surety bond cost in Alberta?

Surety premium is a percentage of the bond or contract amount, not a percentage of expected loss, because the surety underwrites to a no-loss expectation. Strong financials get you the best rate. As a general guide, and always confirmed on a quote:

• Contract bonds typically run from under 1% up to a few percent of the contract value
• The rate per thousand usually drops as the contract value rises (a sliding scale)
• Bid bonds are commonly issued at no extra premium once a facility is in place
• License, permit, and commercial bonds are often priced around 1% to 5% per year
• Surety bond premiums are exempt from GST/HST

What is a bonding facility and how much can I get bonded for?

Rather than approving bonds one at a time, a surety pre-approves you for a facility, a line that lets bonds issue quickly up to set limits. It has a single-job limit (the largest contract it will bond) and an aggregate limit (the total bonded work-on-hand it will carry at once). As you complete work, capacity frees back up.

• Single-project limit: the largest single contract the surety will bond
• Aggregate limit: the total outstanding bonded work allowed at one time
• Capacity is driven mainly by your working capital and net worth
• Reviewed or audited financial statements support larger facilities
• We set the facility up so future bid and contract bonds issue fast

Can a surety bond replace a letter of credit for a development agreement?

In Alberta, increasingly yes. Calgary was one of the first large Canadian municipalities to accept developer surety bonds as security for development-agreement obligations in 2019, and Edmonton, Airdrie, St. Albert, and Strathcona County followed. A surety bond frees up working capital that a bank letter of credit would otherwise tie up against your operating line.

• Secures the municipal servicing you commit to: roads, sewers, water, grading, landscaping
• Accepted as an alternative to an irrevocable letter of credit by a growing list of Alberta municipalities
• Generally unsecured and backed by indemnity, so it doesn't freeze your bank operating line
• Can be reduced as work is completed and accepted
• Often a lower fee than the equivalent letter of credit

What's the difference between a surety bond and insurance?

Insurance is a two-party contract where the insurer absorbs the loss it covers. Surety is a three-party guarantee where the surety expects to recover from you anything it pays out. With insurance you transfer risk; with surety you keep it, and the bond simply guarantees your obligation to someone else.

• Insurance protects you; a surety bond protects the obligee you owe
• Surety is underwritten to a zero-loss expectation, like an extension of credit
• Any claim the surety pays is recoverable from you under the indemnity agreement
• The premium is a fee for the surety's backing, not a pooled risk premium
• This is the most common and most costly misconception about bonds

Who needs a license or permit bond in Alberta?

License and permit bonds are required by provincial and municipal regulators before certain businesses can operate. They guarantee you'll follow the rules of your license and protect the public against financial harm if you don't. Service Alberta and municipal bodies are the usual obligees.

• Motor vehicle dealers licensed through AMVIC
• Direct sellers and home inspectors
• Employment agencies and travel businesses
• Contractors and importers needing municipal permit or CBSA customs bonds