Performance Bonds
A performance bond guarantees that the work gets finished. If a contractor defaults, the surety has to step in — remedying the default, arranging a completion contractor, or taking over the contract itself — rather than simply writing a cheque and walking away. That distinction is the entire point of a performance bond, and it is why owners who understand construction ask for one. Stanhope Simpson places performance bonds for contractors and developers across Atlantic Canada.
What Is a Performance Bond?
A performance bond is a three-party guarantee issued at contract award. You as the contractor are the principal, the project owner is the obligee, and a licensed surety company guarantees that the contract will be performed. It is normally issued alongside a labour and material payment bond, and in Canada each is usually written at 50% of the contract price — though owners can and sometimes do require 100%.
The bond is conditional, not payable on demand. The owner has to establish that you are in default, formally declare it, and satisfy several other conditions before the surety owes anything — and even then the surety may elect to get the job finished rather than pay out.
- Guarantees performance of the contract as awarded, including changes made through the contract’s own change machinery.
- Gives the owner a solvent third party obligated to see the work completed if you cannot.
- Caps the surety’s total exposure at the bond amount, whichever route it takes to resolve the default.
- Runs to the owner alone — subcontractors and suppliers have no right of action on a performance bond.
What it is not is insurance for the contractor. Every dollar paid under a performance bond is recoverable from you under the indemnity agreement signed when your facility was set up. The bond protects the owner; you pay for it, and you repay any loss.
- Liquidated damages under the contract.
- Damages for delay or non-performance, beyond the defined costs of an extended supply period.
- Indirect and consequential loss, including financing costs, lost profit, lost productivity and lost opportunity.
Owners frequently assume liquidated damages are covered by the performance bond. On the current standard form they are expressly excluded. A performance bond funds completion — not the commercial consequences of lateness.
The Claims Process
What Happens When a Contractor Defaults
This is the part most pages skip, and it is the part that decides whether a claim succeeds. The current standard form sets out a prescribed sequence with real deadlines on both sides.
Before default: the pre-notice meeting
An owner can ask the surety to meet before declaring anything, and the surety must propose a meeting within seven business days. Crucially it is not a declaration of default and waives nobody’s rights — which makes it the single most useful thing a contractor in difficulty can steer an owner toward.
Declaring default
The bond does not respond to a contractor simply falling behind. The owner has to run the notice-and-cure machinery in the underlying contract and then formally declare the contractor in default in writing. Without a declaration there is nothing for a surety to act on.
The clock starts
Once notice is given the surety must acknowledge within four business days, propose a conference within five, and deliver its formal position within twenty. That position has to accept liability and name the option chosen, deny liability with specific reasons, or set out what it cannot yet determine.
The surety’s four options
Remedy the default. Complete the contract itself. Obtain bids and arrange a completion contract directly between the owner and the new contractor, funding the cost above the remaining balance. Or pay — and then only the lesser of the performance bond amount and the owner’s net cost of completion.
Work that cannot wait
The owner may carry out work needed for safety, to protect the work from deterioration, or for legal compliance without waiting for the surety’s approval, provided it gives notice within three business days. Further mitigation work can also proceed, at the owner’s cost and on the record.
What the owner must do
Four conditions must all be met: the contractor is in default and has been declared so; contractual notice was given; the owner has performed its own obligations; and the owner has agreed to make the remaining contract funds available to the performance bond surety.
Two things owners get wrong. First, you do not have to terminate the contract to claim — and terminating early can destroy the surety’s cheapest options, which are usually the ones that get you a finished building fastest. Second, every dollar paid to a struggling contractor ahead of the work actually in place is a dollar likely to be lost twice: once to the contractor, and again because only valid and proper payments reduce the balance you have undertaken to hand over. The point cuts both ways, though — an owner who withholds money it genuinely owes fails the condition that it has performed its own obligations. The bond is not a way out of your own contract administration.
The Standard Form
CCDC 221 (2024): What Changed
The standard Canadian performance bond was reissued in May 2024, the first update since 2002, and it grew from roughly one page to thirteen. The Surety Association of Canada is clear that the risk profile did not change — the coverage is the same. What changed is the process, and the clock.
From one page to thirteen
The 2002 form was almost silent on how a claim actually ran. The current form has sixteen sections and three schedules, including a prescribed notice form, a surety acknowledgement, and a template for the surety’s formal position.
Hard deadlines, both ways
Four business days to acknowledge a notice, twenty to deliver a position. A surety cannot sit on a claim — and equally a contractor cannot be slow producing records, because its input is what the investigation runs on.
A pre-default route
The pre-notice meeting did not exist before. It lets an owner get the surety involved before declaring anything, and it expressly does not constitute a declaration of default or waive anyone’s rights.
Recoverable costs, itemised
Professional and external legal fees, out-of-pocket expenses, the direct costs of an extended supply period, and interim and mitigation work are now listed. So are the exclusions — liquidated damages and consequential loss.
The surety’s liability, clarified
The form now says on its face that the surety’s responsibility is secondary to, and no greater than, the contractor’s. If you have a good defence against the owner, so does your surety.
A different limitation clock
Time used to run from when final payment fell due. It now runs two years from the earliest of substantial performance, ready-for-takeover, or receipt of the notice — with a ten-business-day obligation on owners to send the surety the ready-for-takeover confirmation.
The Surety Association of Canada publishes free specimen copies of the 2024 forms, and the documents themselves are issued by the Canadian Construction Documents Committee. If a performance bond in front of you runs to a single page, it is the superseded version — send it to us before it is executed.
Performance Bond Benefits
What a Performance Bond Does for Contractors
Access to the work
Public construction above modest thresholds, and most institutional and lender-financed private work, requires performance and payment bonds. Without a facility in place you are not bidding it.
A surety that would rather fix than pay
A surety’s cheapest outcome is almost always keeping you working. Involve it early and the machinery exists to help; wait until a default has been declared and the options narrow quickly.
Credibility with owners and lenders
A bond is a third party with its own money at risk saying it believes you can build this job. Nothing else in a submission carries that weight.
Your defences travel with the bond
The surety’s liability is secondary to, and no greater than, yours. An owner that has caused the delay is claiming against a surety standing in your shoes — with your defences.
No cash and no bank line consumed
Unlike a letter of credit, a bond does not reduce your operating line or tie up working capital on the very job you are trying to finance.
A record that compounds
Every bonded contract completed cleanly supports the next, larger single-job limit. Your bonding history is an asset on the balance sheet in all but name.
Performance Bond Benefits
What a Performance Bond Does for Project Owners
A finished project, not just cash
This is the whole argument for a conditional bond. It obliges the surety to see the work completed. Cash security hands you money and leaves you to find another contractor yourself.
Prequalification you did not have to do
A surety has already assessed the contractor’s finances, experience, people and capacity — and that judgment is made by a party that pays if it turns out to be wrong.
Completion funded above the contract balance
Where the surety arranges a completion contractor, it funds the excess over the remaining contract funds, up to the performance bond amount.
A defined process with deadlines
Under the current standard form you are not waiting indefinitely for an answer. The surety must acknowledge your notice and take a formal position inside set timeframes.
Nothing to monitor or renew
A bond has no expiry date to diarise and cannot be cancelled. It simply discharges when the contract has been performed — unlike a letter of credit, which you have to keep alive.
For General Contractors
Bonding Your Subtrades
Your own performance bond makes you answerable for every trade on the job. Requiring bonds from the trades that matter moves that risk onto their sureties instead of your balance sheet.
Which trades to bond
The Canadian test is proportion and criticality rather than a dollar figure — how large the subcontract is relative to the project, whether the trade sits on the critical path, how well you know the firm, and whether a replacement could realistically be mobilised mid-job.
What it costs
A matched performance and payment bond pair from a subtrade generally runs around one percent of that subcontract value. Set against the cost and delay of replacing a failed mechanical, electrical or steel trade halfway through, it is rarely the expensive option.
Why it protects your own bond
Without subtrade bonds, a major trade failure lands on you, then on your surety, and then straight back on you through the indemnity agreement. A subtrade bond stops that chain at the first link, and the subtrade’s surety has prequalified them independently.
How your surety reads it
Favourably. Underwriters look closely at how a general contractor manages and mitigates subtrade risk, and a documented policy of bonding major trades is evidence of exactly the discipline they are assessing.
Bond call coming and no facility in place?
We arrange bonding facilities for contractors across Atlantic Canada, and we will tell you honestly what limits to expect before you commit estimating hours to a job you cannot bond.
Duration and Discharge
How a Performance Bond Ends
A performance bond has no expiry date on its face. It ends when the contract is performed — which makes several of the questions people ask about it easier to answer than they expect.
Performance discharges it
Perform the contract and the obligation becomes null and void by its own terms. There is no release to request, nothing to hand back, and no administrative step to take.
It cannot be cancelled
There is no cancellation clause and no unilateral right to withdraw. The bond is a promise made to a third party who relied on it in awarding the contract, so it cannot be pulled once the owner has acted on it.
The warranty period is covered
The bond guarantees performance of the contract, and the contract carries a warranty obligation — one year from substantial performance on the standard construction contract. Longer warranties need a separate maintenance bond and are separately priced.
The limitation clock is shorter than assumed
Time to sue runs from substantial performance or ready-for-takeover, not from the end of the warranty period. On a long-tail defect that gap matters, and it is better understood before you need it than after.
The bond amount erodes
Interim work, mitigation work and the owner’s recoverable direct expenses all come off the ceiling. It is a maximum the surety can be required to pay, not a fund sitting somewhere waiting to be drawn.
Premium follows the final contract price
The bond does not lapse or renew like a policy, but the premium is trued up. Contract increases attract additional premium, reductions can produce a refund, and multi-year contracts carry a renewal premium on the work still to complete.
The Rest of the Programme
Bonds That Sit Alongside a Performance Bond
A performance bond rarely travels alone. These are the instruments most often issued with it, or instead of it.
The bond that comes first. Our bid bond page also covers what a surety underwrites, what documents you will need, and how single-job and aggregate limits are set.
The matching bond issued at award, usually at the same percentage. It gives subtrades and suppliers with a direct contract a route to payment, on a tighter clock than the performance bond.
Where an owner wants warranty protection beyond the contract’s own warranty period, that is a separate instrument, separately priced.
The surety’s pre-award letter confirming the performance and payment bonds will be available. Often required with the bid rather than instead of it.
An alternative route for general contractors managing subtrade risk. It insures you rather than running to the owner, and you do the prequalifying instead of a surety.
Used to release statutory holdback back into a contractor’s cash flow while still protecting the owner’s position.
Frequently Asked Questions About Performance Bonds
The surety guarantees to the owner that the contract will be performed. If the contractor defaults and the owner declares that default in writing, the surety investigates and then chooses how to resolve it: remedy the default, complete the contract itself, arrange a completion contractor and fund the shortfall, or pay. The owner must make the remaining contract funds available whichever route is taken, and the surety’s total liability is capped at the bond amount.
Premium is charged per thousand dollars of contract value on a declining scale, so the rate falls as contract size rises, and stronger contractors are rated better. A conventional pairing of a 50% performance bond and a 50% labour and material payment bond generally works out around one percent of contract value. Premium is adjusted on the final contract price — contract increases attract additional premium and reductions can be refunded — and long contracts carry a renewal premium at each anniversary on the work still to complete.
Once default is declared and the conditions are met, the surety selects one of four options: remedy the default; complete the contract itself; obtain bids and arrange a completion contract directly between the owner and the new contractor, funding the cost above the remaining contract balance; or pay. Note that paying is not the full bond amount by default — it is the lesser of the bond amount and the owner’s net cost of completion after the contract balance is applied.
No. It is a requirement of the owner’s procurement, not of general law. It is standard on public construction above stated thresholds and common on institutional, lender-financed and larger private work. Requirements differ by owner and by province and they change, so the answer for any given job is in the tender documents. Send them to us and we will read them.
No. There is no cancellation clause and no unilateral right to withdraw. A bond is a promise made to a third party who relied on it in awarding the contract, so it cannot be pulled once the owner has acted on it. It has no expiry date either — it discharges by performance of the contract. Non-payment of premium does not cancel it: the surety’s remedy for that is against the contractor under the indemnity agreement, not against the owner’s bond.
You do not apply bond by bond. You establish a bonding facility with a surety through a broker, and once it is in place bonds are issued against approved contracts. Setting up the facility is the substantial piece and takes weeks rather than days. Our bid bonds page sets out in detail what a surety looks at, what documents you will need and how single-job and aggregate limits are set.
The bond amount, sometimes called the penal sum, is the ceiling on everything the performance bond surety can be required to pay. Three things owners commonly get wrong about it: it is a ceiling rather than a fund, so nothing is on deposit anywhere; it is not the measure of a claim, because the surety pays the lesser of the bond amount and the net cost of completion; and it erodes, because interim work, mitigation work and the owner’s recoverable direct expenses all come off it.
No. A performance bond names one principal, one obligee and one specific contract. Each bonded project needs its own bond. What is shared across projects is the facility behind them and, importantly, your aggregate limit — the ceiling on your total work programme, which counts unbonded work as well.
Not once the bond has been issued and the work has started — the premium buys the guarantee for the life of the contract, not a period of cover. What is adjustable is the premium calculation itself: it is based on the final contract price, so a contract that finishes smaller than it started can produce a return of premium, and one that grows attracts additional premium.
Then there is nothing for the bond to respond to. A performance bond guarantees performance of the contract, not the contractor’s profitability. Cost overruns absorbed by the contractor are the contractor’s problem; overruns properly chargeable to the owner through the contract’s change machinery are the owner’s. The bond only engages if the contractor fails to perform and is declared in default.
No. The current standard form expressly excludes liquidated damages, damages for delay or non-performance, and indirect and consequential losses including financing costs and lost profit or productivity. What it does cover, once a default is being resolved, are the owner’s defined direct expenses — professional and external legal fees, out-of-pocket costs, and the direct costs of an extended supply period. If delay damages matter to you, they need to be managed through the contract, not the bond.
No, and this is widely misunderstood. The conditions are that the contractor is in default and has been formally declared so, that contractual notice was given, that the owner has performed its own obligations, and that the owner has agreed to make the remaining contract funds available. Termination is not among them. Terminating early can actually work against the owner, because it removes the surety’s ability to remedy the default or have the contract completed — usually the fastest routes to a finished building.
No. The current form is explicit that no right of action accrues to anyone other than the named owner and its successors. Subtrades and suppliers look to the labour and material payment bond instead, and only where they hold a direct contract with the bonded contractor. One important practical point: the current payment bond form removes any duty on the owner to tell claimants a bond exists, so a subtrade should ask for a copy before mobilising rather than assuming someone will volunteer it.
The bonded obligation follows changes made under the contract’s own change machinery, so routine change orders are inside the bond. The bond amount, however, is a fixed dollar figure on the face of the bond. On a contract that grows substantially, a bond written at 50% quietly becomes 40%, then 35%, of the real contract price. On materially expanded contracts owners should ask for the bond to be increased by rider, and contractors should tell their surety about major changes rather than leaving them to be discovered.
A conditional bond — which is what the standard Canadian form is — requires the owner to establish default and satisfy defined conditions, and lets the surety elect to complete the work rather than pay. An on-demand instrument pays cash when called, with no need to demonstrate anything. The trade-off is that an owner with a conditional bond gets a finished project; an owner holding cash gets cash and still has to find another contractor. On-demand security also consumes the contractor’s bank credit, narrows the bidder pool and has to be monitored for expiry.
Not yet. Prompt payment and adjudication legislation has been passed in Nova Scotia and New Brunswick but has not been proclaimed in force, Prince Edward Island has none, and Newfoundland & Labrador has consulted without enacting. For now, bond claims in the region are governed by the bond wording, the applicable lien legislation and the courts. It is moving, though, and it will change how quickly payment disputes surface — ask us where it stands when it matters to a specific project.
Contract about to be awarded?
Send us the contract and the performance bond forms named in it. We will confirm what is required, in what amounts, and have the bonds ready for execution.