Understanding Why Canadian Contractors Need Surety Bonds

How important they really are

Those that intend to serve Canadians will need to familiarize themselves with the laws of the country. While there are numerous regulations that must be followed, one of the most perplexing is the surety bond. The mass majority of Canadian contractors and businesses will be completely unaware of the surety bond and its purpose. Many will brush off the idea and complain that it is simply another way for the Canadian government to control businesses. While this may be true, there is an underlying importance for the surety bond. The bond is truly a necessity and will help businesses of all shapes and sizes. Below, you will learn why Canadian businesses need a surety bond.

History Of The Surety Bond

A surety bond represents the early form of suretyship, dating back to 2750 BC. Historical evidence also shows that surety bonds existed in Persia, Babylon, Rome, Assyria, Carthage and the Code of Hammurabi. Early Englanders and Hebrews also utilized the bonds to protect their investments. However, it was discovered that suretyship was not always established through bonds. The Code of Hammurabi contains a written code, the earliest mention of surety bond historysuretyship, which was written sometime around 1790 BC.

The system utilized by Medieval England for establishing suretyship, Frankpledge, did not rely on the execution of bonds. The Guarantee Society of London was the first corporate surety, dating back to 1840. The United States Congress passed a law, 1894 Heard Act, requiring all companies involved in federally funded projects to obtain a surety bond.

It didn’t take long for the Canadian government to follow in suit. Today, surety bonds on utilized for private and public construction projects. Most territories and provinces require general contractors to obtain them, before initiating a development project.

Creates A Level Playing Field

Believe it or not, the surety bond is designed to help create a level playing field across the country of Canada. The bond primarily achieves this goal by eliminating fraudulent and nefarious competition. Since the bond is a requirement, it is safe to say that illegitimate companies and those in poor financial standing will be unable to obtain the necessary surety bonds. Therefore, they’ll be unable to bid on projects and this will prevent them from stealing jobs from legitimate, trustworthy and reputable companies, such as yours.

Therefore, the bond is capable of reducing competition and ensuring the project owner or consumer finds the best candidate possible. If the surety bond requirement was not enforced, any Joe off of the street would be able to bid on a project, whether or not they could obtain the subsequent bonds or complete the project.

Leveraging

Another thing to remember is that businesses and contractors can benefit substantially by leveraging with the bond, instead of utilizing their own cash. When putting up your own cash, you’re putting yourself in a very risky situation. If something goes awry and the project falls through, your hard-earned money will be gone and you will have no backup plan whatsoever. At the same time, it is no secret that the majority of contractors will be unable to put this such a substantial amount. By working with a surety company, it will be possible to use the borrowed capital to obtain the bond, while only being forced to pay a small percentage of the total.

This will keep more money in your company’s bank account and that money can be used to better serve your clients. As long as everything goes smoothly, the risks will be minute.

 

Compared To The Letter Of Credit

In some cases, the contractor may opt to utilize a Letter of Credit instead of a surety bond. This is one way to solve the problem, but it is generally not the best solution. The letter of credit will not be a suitable option for many, since collateral is always required. Many business owners do not have collateral to put up, while other will simply refuse to do so. Putting up collateral is generally very risky and could result in your savings or property being confiscated. Many experts agree that obtaining a surety bond is the better option, since it generally delivers more protection and fewer fees.

Bonds are best for small businesses, but are truly suitable for companies of all shapes and sizes. Also, the surety bond will typically cover the entire 100% of the contract, while the letter of credit will generally only cover a small portion, such as 5 to 10%.

GGF – A Surety and Insurance Blogger