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The bonds your tenders, contracts and regulators require, backed by a surety facility built around your balance sheet.
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A surety bond is a three-party guarantee. The surety promises the obligee, usually a project owner or regulator, that the principal, your business, will meet a specific obligation. Contract surety covers construction bid, performance and labour and material payment bonds. Commercial surety covers licence, permit, customs and other obligation bonds. If the surety pays a claim, your business must repay it, so a bond works like credit, not insurance.
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A surety bond guarantees that your business will keep a specific promise: to sign a contract at your bid price, finish the work, pay your subcontractors and suppliers, or follow the rules attached to a licence, permit or customs account. Contract surety covers construction bonds. Commercial surety covers licence, permit, customs and other obligation bonds. Builders and developers with Tarion and municipal security needs should see our residential surety page.
A bond is credit, not insurance. The surety underwrites your character, capacity and capital, and if it ever pays a claim, your company repays it under an indemnity agreement. We help you present your business as a strong credit, secure the single and aggregate limits you need, and grow them as your work program grows. In Ontario that matters most on public contracts of $500,000 or more, where performance and payment bonds are mandatory.
Insurance moves a risk from you to an insurer, which expects to pay some claims and prices for them. A surety bond does the opposite. The surety lends its financial strength to your promise, and it only issues the bond if it believes you can keep that promise. If it ever pays, it comes back to you for every dollar.
Every bond has three parties, and each one gets something different from the deal.
| Party | Who it is | What it gets from the bond |
|---|---|---|
| Principal | Your business: the contractor, licensee, importer or developer whose obligation is guaranteed | The ability to bid, sign or operate without tying up cash or bank lines |
| Obligee | The party protected: a project owner, municipality, government department or regulator | A financially strong guarantor if the principal fails to perform or pay |
| Surety | The insurer that issues the bond. In Ontario, mandatory construction bonds must come from an insurer licensed under the Insurance Act to write surety and fidelity insurance | A premium for lending its credit, plus a right to be repaid by the principal and its indemnitors |
So the surety is a licensed insurer, but the product behaves like a line of credit. That is why sureties underwrite your balance sheet, not your loss history, and why the indemnity agreement you sign matters more than the bond wording.
Contract bonds guarantee obligations under a construction contract. Commercial bonds guarantee obligations to a government body or another business. Many standard Canadian contract bond wordings come from the Surety Association of Canada or the Canadian Construction Documents Committee, and public owners such as Nova Scotia's Department of Public Works base their bid, performance and payment bonds on the association's 2021 forms.
| Bond | What it guarantees | Typical obligee | Usual amount |
|---|---|---|---|
| Bid bond | That you will sign the contract at your bid price and provide the required performance and payment bonds | Project owner running a tender | Set by the tender documents |
| Performance bond | That the contract will be completed according to its terms | Project owner | 50% of the contract price on Ontario public contracts of $500,000 or more; set by contract elsewhere |
| Labour and material payment bond | That subcontractors and suppliers of labour and materials will be paid | Project owner, for the benefit of subs and suppliers | 50% of the contract price on Ontario public contracts of $500,000 or more |
| Maintenance or warranty bond | That defects found during the warranty period will be fixed | Project owner | Set by contract |
| Customs bond | That duties and taxes owed to the Canada Border Services Agency will be paid | CBSA | 50% of the importer's calculated requirement, minimum $5,000 per account |
| Licence and permit bonds | That a licensee or permit holder will follow the rules attached to the licence or permit | Province, municipality or regulator | Set by the regulator |
| Development and subdivision bonds | That a builder will complete servicing and planning obligations | Municipality | Set by the development agreement; see residential surety |
Sureties are financial institutions, and they qualify a contractor much as a lender would. Industry practitioners sum up the test as the three Cs: character, capacity and capital.
Capital usually carries the most weight. A December 2020 analysis in the Daily Commercial News by two Canadian surety practitioners put the leverage a strong general contractor might receive at 20 to 25 times working capital, and 10 to 15 times for electrical and mechanical subcontractors. Those multiples are rules of thumb, not entitlements, and each surety sets its own.
The result is a bonding facility with two numbers: a single project limit, the largest contract you can bond, and an aggregate limit, the total backlog of bonded and unbonded work the surety will support. To grow it, sureties expect CPA-prepared year-end statements, often quarterly or semi-annual internal statements, a work-in-progress schedule, bank confirmation and a business plan. Clean, timely financial reporting is the single most useful thing a contractor can do for its bonding line.
Before issuing any bond, the surety asks you to sign a general indemnity agreement. It is a separate contract in which your company, and often its owners, affiliated companies and sometimes spouses, agree to repay the surety for any loss, legal cost and expense it incurs on your bonds.
Read it as carefully as a bank guarantee, because that is what it is. Typical terms let the surety demand collateral when a claim is made, take an assignment of contract funds and equipment on a bonded job, settle claims in its own judgment, and recover from every indemnitor jointly. Personal indemnity is common for owner-managed businesses. As a company's capital and track record grow, sureties may agree to limit or release personal indemnitors, which is worth negotiating as part of each annual review.
Part XI.1 of Ontario's Construction Act makes bonds mandatory on larger public contracts, meaning contracts where the owner is the Crown, a municipality or a broader public sector organization. The details are in the General regulation, O. Reg. 304/18.
| Rule | What the law says | What it means for you |
|---|---|---|
| Threshold | Section 85.1 applies to a public contract with a contract price of $500,000 or more | Line up bonding before you bid public work at that size |
| Bonds required | On entering the contract, the contractor must furnish a labour and material payment bond and a performance bond, each in the prescribed form | You need both, not one or the other |
| Minimum coverage | Each bond must be at least 50% of the contract price; above $500,000,000 the owner sets the limit, which must be at least $250,000,000 | Your single project limit must cover the bond amount |
| Who can issue | An insurer licensed under the Insurance Act to write surety and fidelity insurance | Offshore or unlicensed guarantors won't satisfy the Act |
| Payment bond reach | The payment bond must extend protection to subcontractors and persons supplying labour or materials | Subs and suppliers can claim directly against the bond |
| Exceptions and extras | The section does not apply to architects or engineers, and owners may still require other bonds or security | Read each tender for bid bonds and maintenance security |
The Act also sets the holdback, prompt payment and lien rules that shape a contractor's cash flow, which our construction industry guide summarizes. Other provinces leave bonding to owner policy and contract. Federal contracts follow the Government Contracts Regulations, which recognize bid security and contract security such as performance and payment bonds, with amounts set in each solicitation.
Commercial bonds guarantee compliance rather than construction. They are usually smaller and simpler to underwrite than contract bonds, but the obligee's wording is fixed, and many are written on demand terms where the obligee decides whether a default has happened.
Customs security is the most common example for Canadian businesses. Under CBSA Memorandum D17-5-2 (October 21, 2024, revised August 8, 2025), importers enrolling in Release Prior to Payment must post financial security in their own legal name. The requirement is based on the importer's highest monthly accounts receivable balance with the CBSA over the previous 12 months. A written security agreement such as a customs bond need only cover 50% of that requirement, with a minimum of $5,000 per business account, while a cash deposit must cover 100%. Security is capped at $10 million per account. For a growing importer, a bond frees cash that would otherwise sit on deposit. Our cross-border insurance and cargo insurance pages cover the rest of an importer's program.
Owners and regulators often accept more than one form of security, and contractors often assume a bond protects them. This is how the three compare.
| Surety bond | Insurance policy | Bank letter of credit | |
|---|---|---|---|
| Who it protects | The obligee | You, the policyholder, and third parties you injure | The beneficiary |
| If it pays, who bears the loss | You do, through the indemnity agreement | The insurer, after your deductible | You do, as a draw on your bank facility |
| Effect on borrowing | Usually sits outside your bank lines | None | Reduces your available credit, often dollar for dollar |
| Underwritten on | Character, capacity and capital | Loss exposure and claims history | Your credit and collateral |
| Examples | Performance, payment, customs bonds | Commercial general liability, builder's risk | Standby letters of credit for deposits or municipal security |
| Not covered by your bond | How to cover it |
|---|---|
| Your own liability for injury or property damage on the job | Commercial general liability with completed operations |
| Damage to the project while it is being built | Builder's risk or an installation floater |
| Theft or damage to your tools and equipment | Tools and equipment floater coverage |
| Design errors by a design-build contractor | Professional liability coverage |
| Your losses if a subcontractor defaults | Bonds from your subcontractors, or subcontractor default insurance where available |
| Losses the surety pays on your behalf | Nothing: you repay them under the indemnity agreement |
Bond premiums are charged as a rate on the bond amount, and the rate reflects credit risk rather than loss expectations. Sureties set it from:
Ask how bid bonds are charged when you set up a facility, because practice varies by surety. The bigger cost is usually indirect: weak financial reporting that holds your bonding line below the work you could win, or a letter of credit that ties up borrowing you need for payroll and materials.
Insurabiz is an independent brokerage that works only in business insurance. For surety, our job is to present your business as a credit, match it to a surety whose appetite fits, and keep the facility growing with you.
Our post on surety bonds for contractors is a shorter primer you can share with your accountant.
Our claims team stays involved from the first notice. Early contact usually gives the surety and you more options and a smaller loss.
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This page is general information, not insurance or legal advice. Coverage depends on your policy wording and the insurer. Speak with a licensed broker about your situation.
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