Written by Richard Zehr
BBA, CAIB, President, Zehr Insurance
You’ve won the job. The bid bond did its work. Now the performance bond takes over, and it stays active until the project is completed and final holdbacks are fulfilled.
Most contractors treat a performance bond as a box to check during contract formation. The ones who’ve been through a performance bond claim understand it very differently. This guide explains how the performance bond functions through the construction process, what happens if a claim is made against it, what the surety can do about it, and what your obligations are at every stage.
What a performance bond is and what it’s guaranteeing
A performance bond is a three-party agreement between you (the principal), your bonding company (the surety), and the project owner (the obligee). The surety is guaranteeing to the owner that you will complete the contract in accordance with its terms and conditions.
That guarantee is not unconditional. The surety isn’t promising the owner a perfect project they’re promising that the work will be completed to the standard the contract requires. Every word of your prime contract matters because the bond is written around it. The bond doesn’t expand your obligations, but it doesn’t shrink them either.
The penal sum the bond’s maximum dollar exposure is typically 50% of the contract price on private work and 100% on many Ontario public projects. That ceiling covers the cost to complete your work if you default, not damages for delay or owner losses beyond the contract scope.
How the performance bond follows the project through construction
Unlike an insurance policy that sits dormant until something goes wrong, the performance bond is active from contract award to substantial completion.
In practice, this means a few things that contractors often don’t anticipate:
- The surety monitors the project’s health. Most surety companies receive regular project financial reports, particularly on larger bonds. If your bonding broker is doing their job, they’re keeping the surety informed of progress, payment status, and any emerging issues. A project that is tracking on schedule and on budget stays quiet. One that is running over budget, falling behind schedule, or generating owner correspondence gets attention.
- Material changes to the contract must be managed carefully. Significant scope changes, contract price adjustments, or time extensions can affect the bond’s validity if not handled correctly. The general rule is that a surety’s obligations are not automatically extended by a contract modification unless they consent. On most standard CCDC contracts, a schedule of prices adjustment or a change order within the general scope of the work won’t jeopardize the bond. But a major scope deletion, a fundamental price restructuring, or an owner-contractor settlement that alters the basic bargain can. When in doubt, communicate with your surety before executing major changes.
- Default notices and notices of termination are time-sensitive triggers. If the owner believes you are in default, they will typically issue a formal notice under the contract requiring you to cure the default within a specified period. That notice is also a signal to the surety. What happens in the days and weeks following a default notice, who communicates what, how quickly has a significant bearing on how a performance bond claim unfolds.
What triggers a performance bond claim
A performance bond claim is triggered when the owner declares the contractor in default and makes demand on the surety to fulfill the bond’s obligations.
Default under a construction contract in Ontario generally means one of the following:
Abandonment. You have walked off the project and ceased work without legal justification and shown no credible intention to return.
Failure to maintain progress. The project is so far behind schedule that the owner has reasonable grounds to conclude you cannot or will not finish on time.
Financial failure. You have become insolvent, entered receivership, or made an assignment in bankruptcy. This is the most common trigger for a formal performance bond claim.
Persistent failure to comply with the contract. Repeated deficiency in work quality, failure to correct deficient work after notice, or ongoing non-compliance with contract requirements that have not been remediated.
Owner-declared termination for cause. The owner has followed the termination process in the contract, terminated for cause, and the termination is valid.
One critical point that many contractors don’t fully appreciate is that a performance bond claim requires the owner to have properly followed the contract’s default and termination provisions before making demand on the surety. If the owner has short-circuited those provisions and terminated without proper notice, declared default without giving you the cure period the contract requires, the surety can and will scrutinize whether a valid default exists. A technically defective declaration of default is a legitimate defence.
What the surety can do in response to a performance bond claim
Once the owner makes a valid demand under the bond, the surety has several options. Their choice is driven by the stage of the project, the cost of completion, the validity of the default, and the practical reality on the ground.
- Investigate the claim before taking any action. The surety is not obligated to accept the owner’s declaration of default at face value. They will conduct their own investigation through reviewing the contract, the project records, the payment history, and the circumstances of the default. This investigation phase is where your co-operation is most critical.
- Remedy the default and keep you on the project. If the default is curable such as a payment dispute that can be resolved, a specific performance issue that can be fixed the surety may provide financial assistance or arrange for the deficiency to be corrected while keeping you in place as the contractor. This is generally the surety’s preferred outcome when the relationship between you and the owner hasn’t completely broken down.
- Arrange for completion with a new contractor. If you cannot or will not complete the work, the surety can tender the remaining scope to a replacement contractor and pay the costs of completion up to the bond’s penal sum. The surety will manage this process directly with the replacement contractor, often with input from the owner.
- Complete the work through their own forces. Less common, but available: the surety can retain their own forces to complete the project directly. This is typically a last resort on projects where tendering would take too long or where the remaining work is straightforward enough to manage directly.
- Deny the claim. If the surety’s investigation concludes that no valid default exists and that the owner improperly terminated, failed to follow the contract’s notice requirements, or contributed to the situation through their own breach, the surety can deny the claim and defend that position. This puts the dispute back between you and the owner.
- Tender a completion solution and negotiate with the owner. On complex projects, the surety may negotiate directly with the owner about the method and cost of completion, the scope of the owner’s contribution from remaining contract funds, and the surety’s net exposure under the bond. You are not always a direct party to these negotiations, but your indemnity obligations remain fully intact.
Your co-operation obligations during a performance bond claim
Everything flows from your indemnity agreement. When you signed the bond, you committed to indemnifying the surety for every dollar they pay out on your behalf and to fully co-operating with their investigation and response. These obligations are binding regardless of whether you believe the default declaration is justified.
- Respond immediately to the surety’s outreach. When a claim is filed, the surety’s claims team will contact you promptly. Delayed responses signal disorganization or bad faith. Return calls and respond to written requests the same day.
- Produce your project records without filtering. The surety needs the complete picture: your contract and all amendments, your schedule and schedule updates, change orders, site meeting minutes, correspondence with the owner, RFI logs, inspection reports, deficiency lists, and financial records showing your cost position on the project. Do not produce a curated version. Give them everything.
- Be honest about your financial position. If you are in financial difficulty such as cash flow problems, cost overruns, or financing gaps tell the surety directly and early. The surety has seen every version of contractor financial stress. They are not your adversary in this conversation. A surety that understands your financial position can sometimes provide bridge support or restructure the situation in a way that avoids a formal claim. A surety that discovers your financial position through third parties after the fact has far less ability and inclination to help.
- Participate in the surety’s site investigation. The surety will often conduct their own physical review of the project which includes assessing the state of the work, the cost to complete, and the reasonableness of the owner’s position. Make your site superintendent and project team available for these visits.
- Do not take actions that prejudice the surety’s position. Do not abandon equipment or materials on site in a way that creates disputes. Do not make statements to the owner, in writing or verbally, that constitute admissions about the validity of the default. Do not negotiate a resolution directly with the owner without the surety’s knowledge and consent as any settlement that binds the surety requires their agreement.
- Disclose your defences clearly and early. If you believe the owner’s default declaration is wrongful and the project owner failed to follow the contract’s notice provisions, they contributed to the delay through their own actions, they failed to make payments that were due then you as the principal should put those defences in writing to the surety immediately. The surety can assert these defences on your behalf, but they need the facts and the timeline from you.
What information the surety needs to protect you effectively
The surety’s ability to protect your interests and to minimize the claim’s ultimate cost to you, depends entirely on the quality of the information you provide. When a claim is being investigated, have the following ready:
- Your prime contract and all addenda, change orders, and amendments. The surety needs to understand exactly what you were contracted to do and for how much.
- Your project schedule and all updates, revisions, and approved extensions. This is the primary lens through which the surety will evaluate whether delay-based default was justified.
- All correspondence with the owner related to schedule, payment, deficiencies, and any events that contributed to the default situation. Every formal notice, every letter, every email that documents the history of the dispute.
- Your cost-to-complete analysis. What does it cost to finish the remaining work? The surety will develop their own estimate, but your internal figures, especially if you have current subcontract pricing, are valuable input.
- Payment records showing what the owner has paid, what is in holdback, and whether any payments were improperly withheld. A performance bond claim that has its roots in an owner payment failure is a very different claim than one caused by contractor abandonment.
- Your subcontractor and supplier status. Which trades are still on site? Which have been paid? Which are at risk of walking? The surety needs to understand the state of your supply chain because a performance bond response often involves managing those relationships as part of completing the project.
- Any communications or evidence that bear on the owner’s conduct including their obligations under the contract, their role in any delay or cost overrun, any actions they took that contributed to the situation you’re in.
How the performance bond protects the project owner and what that means for you
The owner’s interest in a performance bond is simple and absolute: they want a finished building, road, or facility, delivered according to the contract they signed. They do not want to go back to the market, re-tender, and pay a premium to a new contractor to pick up abandoned work. They do not want to manage a construction site themselves. They do not want litigation.
The performance bond is the mechanism that removes the owner’s exposure to that outcome. If you fail to complete the contract, the owner can call on the surety to step in and get the project finished without starting over, without losing their financing timeline, and without bearing the cost of completion out of their own pocket beyond the remaining contract funds.
Every action the surety takes in response to a performance bond claim is aimed at that single outcome: a completed project. The investigation isn’t bureaucracy. It’s the surety confirming that a valid default exists so they can respond correctly. The completion arrangements aren’t punitive; they’re the mechanism for delivering the project the owner contracted for. The negotiation with the owner about remaining contract funds isn’t the surety protecting itself at your expense and it’s the process of minimizing the net cost of completion so that your indemnity exposure is as small as it can be.
This is the broader purpose of the performance bond within Ontario’s contract surety system. The bid bond qualified you and committed you to your price. The L&M bond protects your supply chain and keeps liens off the owner’s land. The performance bond is the guarantee that the project gets built to the contact specifications.
Contractors who understand this and who treat the surety as a partner in project delivery rather than an adversary, are the ones who navigate performance bond situations with the least financial damage. The ones who avoid the surety, filter information, or try to manage the situation on their own tend to find out that their indemnity agreement is both ironclad and expensive.
About Zehr Insurance
At Zehr Insurance, we work with contractors to free up cashflow and support project completion through surety bonds. Bond facilities are to limited to only large construction firms. If your company is financially strong and you are interested in exploring bonding options, please contact our office.
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