Performance Bonds for General Contractors and Project Owners

Performance bonds help to redistribute the risks associated with construction projects for owners and general contractors alike. Construction projects can be complex undertakings that involve a number of tradesmen from different disciplines with interdependent schedules. Often times, a general contractoris responsible for the day-to-day oversight and overall coordination of a project, however, that doesn’t guarantee that everything will remain on schedule. Delays are common during the construction process, especially in the event that one contractor experiences difficulties performing its portion of the work, as this can have a significant ripple effect on the entire project. When a contractor defaults in its obligations to perform work, it can significantly delay the expected completion time for the project, while also increasing the costs to completion. A performance bond acts as a guarantee for the satisfactory completion of a project, protecting both the contractor and owner in the case of an unfortunate event (such as the insolvency of a contractor).

What is a Performance Bond?
A performance bond is a bond that guarantees that the bonded contractor will perform its obligations under the contract in accordance with the contract’s terms and conditions. These bonds generally consist of a three-party agreement between a surety, a principal, and an entity that will benefit from the issuance of the bond. Performance bonds are typically made in the amount of 50% of the contract amount, but can also be issued for 100% of the amount of the contract as well.

How Performance Bonds Work

Performance and payment bonds are often issued as part of a Performance and Payment Bond, where a Payment bond guarantees that the contractor will pay the labour and material costs that they are obliged to. Performance bonds help all parties involved mitigate their overall risk in the event of a default by transferring the immediate financial burden to the surety.

In order for a performance bond to be effective, the contract must explicitly define the agreed upon work to be completed. Contractors cannot be held accountable for work that is vaguely described or open to interpretation.

Costs and Requirements
The surety calculates the premium for the bond based on three primary criteria:

·       The bond type;

·       Bond amount;

·       The applicant’s risk.


Payment from the performance bond is only available to the owner and no one else can make claims against it. Surety and financial institutions have different requirements depending on the capacity of the contractor, the volume of the project being insured, and the degree of difficulty involved in completing the project. As a rule of thumb, contractors should expect the cost of the performance bond to be about 1% of the total value of the contract.

Performance bonds for general contractors help ensure that projects are completed in a timely manner, while also protecting the project owners from incurring any additional costs in the event of a default. Performance bonds are useful tools for general contractors and owners looking to minimize their risk when taking on a major construction project.

Insurance Brokerage Serving the Greater Toronto Area (GTA) for Over 30 Years

Commitment to our clients is to provide:

  • Right insurance program.
  • Right insurance company.
  • Right price.
  • Recommend practical loss prevention measures.
  • Guide and assist you during claims3 settlement process.
Powered by RWARDZ