The construction sector is massive, employing millions of people around the world. The sector comprises of construction businesses and development companies primarily engaged in the construction of buildings or engineering projects like highways and utility systems.
In the U.S, the market size of the construction sector was valued at around USD 1.36 trillion in 2020, with spending on private construction continuing to grow as construction of private residential and non-residential buildings saw some of the biggest ever-recorded growth.
In Canada, the construction sector employs approximately 1.2 million people and, together with the U.S., the North American Construction Market that is segmented by country (Canada and United States) was valued at around USD 2.1 trillion in 2021.
The North American construction market is projected to grow at a rate of about 4.84% during the forecast period between 2022-2027. That means business opportunities in the construction sector are poised to increase, and the performance bond industry is also booming.
If you are considering entering into this sector, or you are already a business owner in construction and real estate development, you may be wondering what exactly performance bonds are, and how they can benefit your company.
What Is a Performance Bond?
A performance bond, sometimes also known as a contract bond, is a type of surety issued as a guarantee against the failure of a party to meet obligations specified in a contract.
In the construction sector, a performance bond is simply a type of surety bond that project owners often require to protect themselves from financial loss if the contractor fails to complete the project. It’s designed to guarantee a project or contract completion.
As you might expect, there are different types of performance bonds, and each one serves a specific purpose. If your business is based in the Great White North, it helps to explore the most popular types of performance bonds Canada, and how they can benefit your business.
Similarly, if your business is based in the U.S, the U.K, or any other country, it’s also important to research and explore the most popular types of performance bonds available in the construction market in your country.
According to Firstbrook Cassie & Anderson, a provider of insurance and surety solutions for mid to large size clients, in the Canadian construction market, for example, there are different types of performance bonds that are popular, including:
I. CCDC Performance Bond
A standard surety performance bond form provided by Canadian Construction Documents Committee guaranteeing performance of the contract by the Contractor.
II. SAC Headstart Subcontractor Performance Bond
A performance bond wording preferred by General Contractors when requesting performance bonds from subcontractors.
III. Form 32 Performance Bond
A new standard bond wording utilized in Ontario by all public entities for contracts over $500,000.
Parties Involved in a Performance Bond Agreement
Three parties are involved in a performance bond agreement:
- The obligee: the entity who requires the bond, typically a government agency or municipality
- The principal: the business or individual who will be performing the work specified in the contract
- The surety: the company that provides the bond and guarantees the completion of said work
How Performance Bond Work
In a performance bond, an obligee requires the bond as protection against shoddy work or non-completion of a project.
Performance bonds are typically in the amount of 50% of the contract amount, although they can also be issued for 100% of the contract amount.
The principal obtains the bond to bid on jobs requiring one.
And finally, the surety underwrites the bond and agrees to pay the obligee if the principal fails to meet their obligations.
Benefits of Performance Bonds
There are at least two key benefits of performance bonds:
1. They Protect the Oblige
If the contractor fails to meet their obligations, the performance bond will cover any financial losses incurred by the oblige. It includes things like cost overruns, delays, and subpar work.
Performance bonds also offer some protection for the contractor. If they are accused of not meeting their obligations, they can use the bond to prove that they did everything they were supposed to do.
Some will require a performance bond as part of the contract. Others will allow the contractor to get one on their own.
But in either case, it's generally a good idea for the contractor to have one. They offer peace of mind and protection against financial losses.
2. They Improve Your Chances of Getting the Job
If you're bidding on a project, having a performance bond can give you an edge over your competition. It shows that you're a responsible contractor willing to stand behind their work.
And if you're a small business, a performance bond can level the playing field against larger companies.
Performance bonds are not required for every job. But if they are, they can be the difference between winning and losing a bid.
As a construction business owner, you are responsible for ensuring that your projects are completed on time, within budget, and to the required standards. Performance bonds provide financial protection if you are unable to do this.