Financial security and contractor difficulties

Financial security, in Canadian federal procurement, is security that an offeror or contractor provides to protect Canada against specified risks. Those risks include an offeror declining to sign a contract, a contractor failing to meet its obligations, and subcontractors or material suppliers going unpaid. CanadaBuys sets out how federal buyers plan for it in the financial considerations guidance.

Contractor difficulties are the other half of the subject. They arise after award, when a contractor shows signs that it may have trouble fulfilling the contract requirements. When financial security is in place, the buyer must immediately notify the surety company, as the contract management guidance explains.

Three forms of financial security

CanadaBuys identifies three types of financial security, each tied to a different risk.

• Offer financial security protects Canada if an offeror fails to enter into a contract.
• Contract financial security helps ensure that a contractor fulfils its contractual obligations.
• Payment bonds protect subcontractors and material suppliers.

The guidance discusses several instruments that can carry this security: government-guaranteed bonds, bills of exchange, irrevocable standby letters of credit and surety bonds. A surety bond involves a surety company that stands behind the contractor, which is why the surety is the party notified when trouble appears.

When buyers require it and how much

The decision on financial security must be made before a competitive procurement is issued. The relevant clauses then go into both the solicitation and the resulting contract, so bidders see the requirement up front. The CanadaBuys planning page also states that contract financial security must be sought for construction contracts with an estimated value above $500,000 CAD.

Outside that construction threshold, the choice is risk-based. The amount and necessity of contract security should reflect the type of work, the consequences of contractor default and the cost of obtaining the security.

Suppliers must provide the specified security in the required form and within the stated time. Failure to provide contract financial security can lead to forfeiture of offer security or a demand under a letter of credit. A letter of credit should also carry an expiry date beyond the anticipated risk period, giving Canada time to confirm performance or make a demand for payment if obligations are not met.

What happens when a contractor shows difficulty

Contract management guidance treats early warning signs seriously. If a contractor shows signs of difficulty fulfilling the contract requirements and financial security exists, the buyer notifies the surety company immediately. The CanadaBuys contract management page places this duty with the buyer, not the contractor, so the surety hears about problems while options remain open.

Amendments, expiry and release

Changes to a contract can affect the security behind it. Material amendments to the contract price, the scope of work, completion or delivery dates, or the payment schedule may alter security obligations. For changes like these, the buyer should obtain the surety's consent before approving them.

Security also ends. Once contractual obligations are met, surety bonds expire automatically and must be destroyed. Other forms of security may need to be returned or released to the contractor.

What it means for a supplier

Check each solicitation for financial security clauses before you bid, and confirm you can obtain the required instrument in the required form and time. Construction bidders should expect contract security on work estimated above $500,000 CAD, per the CanadaBuys guidance. During delivery, raise performance problems early, because the buyer must notify your surety when difficulty appears. Seek surety consent before agreeing to any change in price, scope, dates or payment schedule.