Bonding 101

Introduction:  

In the aftermath of the COVID-19 pandemic, Canada’s water infrastructure industry has witnessed unprecedented growth, specifically due to new housing and industrial construction, presenting significant opportunities for less experienced and/or financially unstable contractors. However, these opportunities bring risks for project owners. This article explores the role of bonding in water infrastructure projects, explaining the nature of bonds, the reasons owners should insist on them, and highlighting specific areas within the industry where bonding is currently underutilized. 

Understanding Bonds:  

In the context of water infrastructure projects, a bond acts as an insurance policy secured by the contractor and payable to the owner, to ensure successful completion of a project. This guarantee typically takes two forms: 

1. Performance of the Job: In the event of a contractor’s inability to complete the project, the bonding company steps in to ensure its successful conclusion at the agreed-upon terms. 

1. Payment of Suppliers and Subcontractors: The bonding company steps in to settle payments owed to suppliers and subcontractors, avoiding potential complications where, in the absence of a bond, these entities might seek payment directly from the owner or place a lien on the project. 

The Owner’s Perspective:  

Owners of Water Infrastructure projects should insist on bonds due to their pivotal role in ensuring project success. Bonding companies conduct thorough assessments of the financial and operational stability of their contractor clients, providing owners with confidence in partnering with reputable firms with a history of completing projects successfully. Additionally, bonding companies offer a mechanism for dispute resolution and compensation in the face of issues arising during the construction process. 

Underutilized Areas for Bonds:  

Despite the common mandate for bonding in municipal projects, there are two specific areas within the water infrastructure industry where bonds are frequently underutilized: 

1. Industrial Projects: Large-scale industrial projects, with their complexity and time sensitivity, often lack bonding. However, integrating performance guarantees through bonds in these projects can effectively mitigate associated risks. 

1. Large Subcontracts: While many projects require a GENERAL contractor to provide a bond to the owner, the scenario changes when a single subcontractor represents a substantial portion of the work. For example, if a single subcontractor represents 50% of a project, GENERAL contractors can protect themselves by requesting bonds from the subcontractor. 

Cost Considerations:  

Bonding a water infrastructure project typically incurs a cost of approximately 1% of the project’s value. From an owner’s perspective, this expense should be viewed as a crucial risk mitigation tool, especially in the current construction landscape where growth and opportunities coexist with potential vulnerabilities. 

Conclusion:  

As the water infrastructure sector continues to thrive in the post-COVID era, the importance of bonding cannot be overstated. Owners must recognize the value of requiring bonds into their projects, ensuring not only successful project completion but also mitigating risks and fortifying defenses against potential financial challenges.