Performance and Labour & Material Bonds in Ontario

A construction bond is a three-party arrangement that sits alongside a construction contract. The contractor (called the principal) arranges the bond, a surety company issues it, and a third party — usually the project owner, or in some cases a subcontractor or supplier — is the one protected by it. If the contractor fails to meet a specific obligation the bond covers, the protected party can make a claim against the surety instead of being left to absorb the loss alone.

Bonds are most often discussed in pairs on Ontario construction projects: a performance bond and a labour and material payment bond. They protect different people against different risks, and a given project may require one, both, or neither depending on its size, sector, and the owner’s requirements.

The surety issuing a bond generally underwrites the contractor before agreeing to issue it, reviewing the contractor’s financial position, track record, and capacity to carry out the work. This underwriting step is part of why bonding is often treated as a useful signal of a contractor’s reliability — a surety that has agreed to stand behind a contractor has, in effect, already done some due diligence that an owner would otherwise have to do on its own.

A performance bond protects the owner of a project if the contractor defaults on its obligations under the construction contract — for example, by abandoning the project partway through, failing to meet quality or schedule requirements in a way that amounts to a material breach, or becoming insolvent before the work is finished.

When a valid claim is made, the surety’s typical response is to arrange for the remaining work to be completed, often by stepping in to manage completion directly or by financing the owner’s engagement of a replacement contractor, up to the bond’s stated amount. The goal is to get the project finished without the owner having to absorb the full cost of the contractor’s default out of pocket.

A performance bond is generally tied to the specific contract it was issued for and has a defined bond amount, so it is not an open-ended guarantee against every possible cost increase or delay on a project — only the risk the bond itself was written to cover.

Owners sometimes assume a performance bond will simply hand over a cheque the moment a contractor falls behind schedule. In practice, a surety generally wants to confirm an actual default has occurred under the contract, not just a disagreement about pace or quality, before it steps in. This distinction matters because a premature or poorly supported claim can be denied, leaving the owner to pursue the contractor directly after all, having lost time in the process.

A labour and material payment bond protects a different group entirely: the contractor’s own subcontractors and suppliers. If the general contractor fails to pay a subcontractor or supplier for work or materials properly supplied to the project, that subcontractor or supplier can generally make a claim directly against this bond.

This matters because subcontractors and suppliers are often not in a direct contractual relationship with the owner, which can leave them exposed if the general contractor runs into financial trouble. A labour and material payment bond gives them a route to recovery that does not depend entirely on the general contractor’s solvency. It complements, rather than replaces, the lien rights subcontractors and suppliers already have under Ontario’s Construction Act — see our guide to construction liens in Ontario for more on how those rights work.

Claims under this type of bond usually need to be made within a defined window and following specific notice requirements set out in the bond itself, so subcontractors and suppliers relying on one generally need to pay close attention to those deadlines rather than assuming the protection is open-ended.

A labour and material payment bond can be especially valuable on a project where the general contractor is working with many smaller subcontractors, since it reduces the risk that a chain of non-payment cascades down the project — each smaller trade left chasing the one above it. Subcontractors bidding on bonded projects sometimes treat the presence of this bond as a meaningful factor in deciding whether to take on the work in the first place.

Bonding is not a universal requirement on every Ontario construction project. On smaller private jobs, particularly residential renovations, bonds are uncommon, and the parties generally rely instead on contract terms, holdback, and lien rights for protection. See our guide to holdback requirements in Ontario for how that protection works on a typical project.

On larger private projects, and especially on public-sector and institutional work — municipal infrastructure, schools, hospitals, and similar projects — bonding is frequently a standard requirement built into the tender documents and the resulting contract. Owners on these projects often require both a performance bond and a labour and material payment bond as a condition of award, precisely because the scale of the project makes a contractor default more costly and more disruptive if it happens.

A bond claim typically starts with formal written notice to the surety describing the default or non-payment, along with supporting documentation: the underlying contract, records showing what went wrong, and any prior notices already sent to the contractor about the issue. Bonds usually set out specific notice periods and procedural requirements, so following the bond’s own terms closely matters.

Once notified, the surety generally investigates the claim — reviewing the contract, speaking with the contractor, and assessing whether the claimed default or non-payment is valid. Depending on what it finds, the surety may deny the claim, negotiate a resolution, or respond by financing completion of the work or paying out amounts owed to unpaid subcontractors and suppliers, up to the bond’s stated limit.

Because this process involves an investigation rather than an automatic payout, claims can take time to resolve, and a surety is entitled to dispute a claim it believes is not supported by the facts or does not meet the bond’s requirements.

It is worth being clear that bonds and construction liens are not substitutes for one another, even though they can both come into play on the same project. A lien is a statutory right under the Construction Act that attaches to the project property itself, while a bond is a contractual guarantee backed by a surety company and is entirely separate from the land. Having a bond in place does not remove a subcontractor’s or supplier’s underlying lien rights, and in some situations a party may be able to pursue both routes depending on the circumstances and the amounts involved.

For projects where a dispute has already escalated into a registered lien, see our guide to discharging or vacating a construction lien for how that process generally works, including how posting security can sometimes substitute for a bond already in place on the project.

This article is general information about how performance and payment bonds generally work on Ontario construction projects, and is not legal advice about a specific bond, contract, or claim. For further resources, see our tools or contact page.