Performance Bond: What You Need to Know for a Public Contract

Karine runs a mid-sized construction company. She just won her first big public renovation contract. Relief, then surprise: the documents require a performance bond and a labour, materials and services payment bond before signing. She knew about the bid security, but not these. A fair question: what are they, what do they cost, and where do you get one, fast?

Performance bond vs bid security

This is the first confusion to clear up, because the two don't come into play at the same moment.

The bid security goes with your offer: it guarantees the buyer that, if you win, you'll actually sign the contract on the terms you submitted. It plays out before the award.

The performance bond comes into play after: once the contract is yours, it guarantees that the work will be carried through to completion according to the plans and specifications, even if your company defaults partway through.

How much: the amount of the performance bond

The amount isn't fixed once and for all: it's specified in the tender documents, and represents the ceiling covered by the surety.

In practice, particularly in the municipal world, it's often around 50% of the contract value, a benchmark documented by the Ministère des Affaires municipales. It can differ depending on the body, the risk and the type of contract: for provincial public bodies, it's not a percentage set by regulation, but a value specified in the specifications (cahier des charges). The FQM also notes that case law has recognized that a municipality could, in certain cases, require a performance bond for 100% of the contract value. The reflex to have: don't assume, read the exact percentage required in the specifications before you price your bid, because that cost feeds into your price.

The mandatory companion: the labour, materials and services payment bond

On provincial public contracts of $2M and up, the performance bond goes hand in hand with a bond for the payment of labour, materials and services. In the municipal world, it's also very common on construction contracts, but always check the tender documents.

Its role is different and complementary: it gives your subcontractors and suppliers a direct recourse against the surety if they aren't paid. Without this guarantee, an unpaid party can, when that recourse is available against the property, register a legal hypothec for construction, which creates a risk for the buyer. On certain public property, that recourse is limited or impossible: the bond then also serves to protect the payment chain. It's one of the reasons these guarantees are required: they protect the chain, not just the buyer.

Here too, its amount is stated in the tender documents; it's often comparable to that of the performance bond, but check the exact percentage.

Where and how to get one

The performance bond is obtained from an authorized institution, most often an insurance company specialized in surety, through a broker. The process isn't instant: the surety analyzes your financial statements, your track record, your order book and your capacity to deliver. It then grants you a capacity (a total amount it agrees to guarantee) and issues bonds contract by contract.

What this means for your bid

Three concrete reflexes when a call for tenders requires a performance bond:

1. Read the required percentage (and that of the labour, materials and services bond) as soon as you analyze the specifications. It shapes your eligibility and your price.
2. Check your capacity with your surety before bidding on a large contract. Bidding without enough bonding capacity means risking winning a contract you can't guarantee.
3. Build the premium cost into your pricing, as a full project expense.

The performance bond isn't a formality: it's often a condition of entry to public construction contracts (and it's mandatory for covered provincial contracts of $2M and up). Bonding capacity is often what separates an SME that can aim for big contracts from one that hits a ceiling. The good news is that it can be built, with clean financials and an established relationship with a surety.

Sources

• Regulation respecting construction contracts of public bodies (CQLR, c. C-65.1, r. 5), for the framework of guarantees required on provincial public contracts.
• Fédération québécoise des municipalités (FQM): columns on the role of the surety and bid and performance guarantees.
• Association des consommateurs pour la qualité dans la construction (ACQC): fact sheets on construction bonds.
• Ministère des Affaires municipales (Québec): information sheet on bonding in contract management.