Financial Security Requirement

A financial security requirement is a condition in a solicitation or contract that obliges a bidder or contractor to provide a financial instrument to protect the buyer. The instrument covers specified risks, such as a bidder failing to enter into the contract, a contractor failing to perform, or subcontractors and suppliers going unpaid. CanadaBuys and Public Services and Procurement Canada (PSPC) use this term for the practice.

It is a procurement risk-control measure, and it is separate from an information-security requirement such as a Designated Organization Screening or a personnel security clearance. Those requirements protect sensitive information and assets. Financial security protects the Crown financially. The CanadaBuys financial security guidance identifies three forms: offer financial security, contract financial security, and payment bonds.

The three forms of financial security

Each form addresses a different stage of the procurement and a different risk.

• Offer financial security protects Canada if an offeror fails to enter into a contract after being selected.
• Contract financial security helps ensure that the contractor fulfils its contractual obligations.
• Payment bonds, including the labour and material payment bond, protect subcontractors and material suppliers.

A bid bond is a form of bid or offer financial security. A performance bond is a form of contract financial security. Both are set out in the Standard Acquisition Clauses and Conditions Manual.

Acceptable instruments

The CanadaBuys guidance identifies several acceptable instruments: a security deposit, a bill of exchange, an irrevocable standby letter of credit, and a surety bond. Government-guaranteed bonds are also recognized. Which of these a supplier can use depends on what the solicitation permits. Where the solicitation allows a choice, the supplier selects among the permitted forms.

Treasury Board policy and dollar thresholds

Under the Treasury Board Directive on the Management of Procurement, federal contracting authorities must consider obtaining financial security from bidders or contractors in proportion to the risks involved. This includes the risk that a contractor will fail or be unable to perform.

CanadaBuys sets two thresholds at $500,000. Buyers must not require offer financial security for procurements valued at or below $500,000, and contract financial security must be sought for construction contracts with an estimated value over $500,000, according to the CanadaBuys financial security page.

Standard clauses and PWGSC-TPSGC forms

The federal standard clauses give bidders defined ways to meet a bid security requirement. A bidder can provide a security deposit under the applicable clause, or a PWGSC-TPSGC 504 bid bond accepted by an approved bonding company.

For contract financial security, the clauses provide options that include:

• a PWGSC-TPSGC 505 performance bond;
• a performance bond together with a PWGSC-TPSGC 506 labour and material payment bond;
• a labour and material payment bond; or
• a security deposit.

The numbered forms are listed in the Standard Acquisition Clauses and Conditions Manual.

What it means for a supplier

Before bidding, check whether the solicitation makes financial security mandatory. If it does, provide the specified instrument in the required form, amount, and timeframe. An offer with absent or insufficient offer security can be treated as non-responsive and lose the opportunity before evaluation begins.

The successful contractor must supply any contract security within the period stated in the contract. CanadaBuys states that solicitations should warn that failing to provide contract financial security can lead to forfeiture of offer security or a demand for payment under a letter of credit. Suppliers should arrange surety bonds, letters of credit, or deposits with their bonding company or financial institution early, so the instrument is ready when the bid closes or the contract is awarded. The CanadaBuys guidance explains the buyer side of these requirements.