Introduction

This paper compares standard forms for three types of surety bonds: bid bond, performance bond and labour and material payment bond. Standard forms from Public Works and Government Services Canada (PWGSC) and Canadian Construction Documents Committee (CCDC) are presented and compared. Similarities and differences between these standard forms and their impacts to the project and project management are discussed.

Surety Bonds
A surety bond is not an insurance policy. It is an agreement between the owner (obligee) and the bonding company (surety), in which the bonding company guarantees that the contractor (principal) will perform the obligation written in the contract. The format of surety bonds are typically the same, where an obligee, a surety, a principal need to be identified, the purpose and the total amount of payment also need to be clearly stated, the conditions of each bond may vary depend on specific projects. The bond must be signed, sealed and delivered to all parties in order to make it enforceable.

Background of PWGSC and CCDC

Public Works and Government Service Canada (PWGSC) is a department of the government of Canada providing internal servicing and administration which include procurement services. The Acquisition branch is specifically responsible for drafting up construction contract forms for PWGSC. The Canadian Construction Documents Committee (CCDC) is an entity responsible for standardizing contracts, forms and guides for construction industry. It consists of representatives from public and private sectors, also volunteers from Association of Consulting Engineering Companies-Canada, Canadian Construction Association, Construction Specification Canada and Royal Architectural Institute of Canada.

General comparison between PWGSC and CCDC bond forms

Bond forms from both PWGSC and CCDC require principal, surety, security deposit, purpose of the project to be clearly identified. However, since PWGSC is a government entity and all projects using PWGSC bid bond form are government funded. The bonds automatically grant Her Majesty the Queen in right of Canada as the obligee. In comparison, regardless of the nature of the project (either government funded or not), it can always use CCDCs bid bond as it requires the obligee to be identified clearly. 1|Page

Both versions require the bond to be signed and sealed by the principal and the surety, and the date of the bond also needs to be specified. However, PWGSC requires the date of the bond (signed and sealed) to be filled out at almost the beginning of the form, and then requires a witness to sign off the form with the principal and the surety at the bottom of the form where it says signed, sealed and delivered as a confirmation of the delivery, but the identity of the witness is not specified. CCDC requires attorney in fact representing the principal and the surety to sign off as a confirmation of the bond being signed and sealed.

Bid Bond
A bid bond is normally issued with other bidding documents by the surety to the obligee to guarantee that once the principal is accepted for the lowest bid, it will enter into the formal contract with the obligee. If the principal fails to enter the formal contract, then the surety will pay a full or partial forfeiture to the obligee as the penalty. The conditions between the two versions are quite different. PWGSC requires 60 days from the closing date of the tender for the principal to accept the bid, and within 14 days from the day he accepts the bid, the principal should prepare further contractual documents (a performances bond and a labour and material payment bond) and security specified at the beginning of the form. PWGSC also specified the amount of performance bond and labour and material payment bond to be each in the amount of 50% of the contract price. In comparison, CCDC is more flexible in terms of timing. It only requires the date to be specified by the obligee. According to PWGSC, the obligee cannot sue the surety within 12 months from the date of the bond, where CCDC only ask for 7 months. Typically, government funded projects are limited strictly by budget and time. Therefore it is reasonable that PWGSC clearly specifies the timeline and the amount of the security. On the other hand, CCDCs bid bond form is more flexible in timing and it will be suitable for different types of projects, no matter what type of formal contract is used.

Performance Bond
A performance bond is also a written agreement submitted to the obligee by the surety at the time of signing the formal contract in order to ensure the principal fulfill its obligations specified in the contract. If the principal defaults, the surety will be liable for: 1. remedy the default; 2. complete the contract ; 3. obtain bids from other contractors for the completion of the contract and make money available to the owner up to the penal sum of the bond to pay any differences in price; 4. pay the penal amount of the bond to the owner. (ALG-LAW1000, 2011) 2|Page

CCDCs performance bond provides exact conditions as the ones mentioned above, whereas PWGSCs version defines the condition differently. PWGSC specifically defines conditions when the work is not taken out of the principals hands, the surety shall remedy the default; when the work is taken out of the principals hands, the surety will act under the obligees supervision to choose another contractor to complete the work. If the cost of completion exceeds the contract price, then the surety is liable for paying all excess costs until completion of the contract, and only if the obligee is satisfied with the final product, then the surety will get paid for the excess amount. The reason that PWGSCs performance bond has very specific conditions is because government funded projects need to be protected and finished on time. If the government is frequently left with unfinished projects, the excess amount of cost due to contractors default will become a heavy burden on all taxpayers.

Labour and Material Payment Bond

A labour and material payment bond is a guaranty provided by the surety to the obligee, in which the surety agrees to pay subcontractors for labour, material and service in the event that a principal fails to do so under the contract. It intends to protect the obligee in case where the principal defaults and aids the obligee to finish the project. A major difference between labour and material payment bond forms from PWGSC and CCDC is that PWGSCs form clearly states that the surety shall provide limited coverage towards subcontractors who do not have a direct contract with the principal (also called second tier subcontractors), whereas CCDCs form does not provide this support. From this angle, PWGSCs form does provide an extra protection to the government so that there wont be any unfinished projects due to payment defaults by contractors and subcontractors. This condition is to ensure that the project is well-covered from any possible payment failure. In comparison, CCDCs form provides a good coverage for smaller projects, but for large-scale projects, there is a risk of project being affected by payment defaults by subcontractors. PWGSCs form also specifies that no payment is required to be made to the principal regarding costs representing capital expenditure, overhead or general administration in case the principal defaults for his payment to subcontractors. This condition clearly distinguishes the nature of labour and material payment bond from the performance bond. For the purpose of the payment bond, the surety does not responsible for covering costs that are required by the principal in respect of the contract. In addition to above, PWGSCs version also mentioned that the surety can only get paid any money relating to the contract after paying subcontractors all valid claims. This is to ensure that there is no unnecessary cost to the government.

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One condition CCDCs form specified is that the surety will not take advantage of article 2365 of the Civil Code of the Province of Quebec. This is to avoid the possibility of a surety termination by an act or an omission of a claimant.

Conclusion
This paper compared bid bonds, performance bonds, labour and material payment bonds drafted by PWGSC and CCDC. Their similarities and differences are analysed and also their impacts to the project and project management are discussed. In general, due to the nature of these two different entities, forms drafted by PWGSC aids to help and protect government funding projects, whereas forms drafted by CCDC are more flexible and can be used in any type of projects.

References
ALG-LAW1000. 2011. Types of Bonds. Retrieved from http://bb.embanet.com/webapps/blackboard/execute/displayLearningUnit?course_id=_9425_1&co ntent_id=_496494_1 CCDC. (2002). A guide to construction surety bonds. Standard Construction Document. Retrieved from http://bb.embanet.com/webapps/blackboard/execute/displayLearningUnit?course_id=_9425_1&co ntent_id=_496494_1 CCDC. (2011). About CCDC. http://www.ccdc.org/about/index.html Wikipedia. (2011). Public Works and Government Services Canada. Retrieved from http://en.wikipedia.org/wiki/Public_Works_and_Government_Services_Canada

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