Performance Bond

A performance bond is a surety undertaking under which a contractor's surety guarantees the contractor's performance of its contractual obligations. If the contractor defaults, the surety must remedy the default or, when directed by the Crown, complete the work in accordance with the contract.

The term is used mainly in construction and in other contracts where the buyer requires security for performance. The Government of Canada publishes its standard version as Performance bond: PWGSC-TPSGC 505, and other public owners use their own required forms and amounts.

How the PWGSC-TPSGC 505 form works

The federal form makes the contractor's performance obligations the subject of the bond. The surety's obligations arise when the Crown declares the principal to be in default under the contract.

Once default is declared, the surety may be required to remedy the default or to complete the work. The form sets out these remedies, so the Crown does not have to negotiate them after a failure has occurred. The full text is available on the Government of Canada form page.

The parties to a performance bond

• Principal: the contractor whose performance is guaranteed.
• Obligee: the Crown or other owner that receives the protection of the bond.
• Surety: the bonding company that stands behind the contractor's obligations.

The supplier, not the buyer, normally arranges for the bond to be issued and submits it in the required form within the stated deadline.

Performance bonds compared with bid bonds and payment bonds

A performance bond is distinct from a bid bond. A bid bond secures the bidder's obligation after its bid is accepted, while a performance bond secures the work itself once the contract is under way. The federal bid bond form (504) is a separate document from the 505.

A performance bond is also distinct from a labour and material payment bond, which protects qualifying persons who supply labour or materials. Owners often require both bonds together on construction work.

Bond requirements at PSPC, DCC and in Ontario

Federal financial-security clauses in the CanadaBuys Standard Acquisition Clauses and Conditions Manual can require the successful contractor to provide an executed PWGSC-TPSGC 505 performance bond within a stated number of calendar days after contract award. The solicitation specifies the required percentage of the contract price and requires acceptance by an eligible bonding company.

Defence Construction Canada sets out its own terms in its standard construction contract documents. They require a performance bond and a labour and material payment bond, each for at least 50% of the contract amount. A security deposit or irrevocable standby letter of credit for at least 20% of the contract amount is the alternative. The bonds must be in the prescribed form and issued by a bonding or surety company approved by Canada.

In Ontario, the regulation under the Construction Act sets a minimum coverage limit of 50% of the contract price for a performance bond required under that Act, with specific rules for very large public contracts. Where a performance bond is in effect and the contractor defaults, the owner has a right of action against the surety and the contractor in accordance with the bond's terms, as provided in Ontario's Construction Act.

What a performance bond means for your bid

Read the solicitation and the resulting contract for the required bond type, amount, form, deadline, acceptable surety and any alternative security that is permitted. Confirm early that your surety is eligible with the buyer, since federal clauses and DCC both require acceptance or approval of the bonding company. Build the bond cost and the delivery deadline into your bid plan so that award is not delayed by paperwork.