Information Paper: Bonding for Long-term Service Contracts
Introduction
Surety companies often receive requests from their clients to issue bonds for contracts that provide ongoing services such as waste management, snow removal and landscaping. Although terms for service contracts vary, it is quite common to see multi-year terms of three to five years. While the surety industry understands why an Obligee would want a long-term contract, Sureties find it problematic to issue fixed, long-term guarantees. To achieve a mutually beneficial solution, the surety industry has developed multi-year performance and payment bonds that contain a renewable feature.
How does a multi-year renewable bond work?
The multi-year renewable bond acknowledges the overall contract term, while stipulating an “initial term” for the bond and a “renewal term(s)”. The initial term will typically run for a period of one to three years following which the Surety will have the option of extending the term.
With a Surety Association of Canada (SAC) Renewable Performance Bond for a Multi-Year Contract bond and SAC Renewable Labour & Material Payment Bond for a Multi-Year Contract, notice of non-renewal must be provided by the Surety in writing at least 90 days prior to the end of term. If the Surety provides no notification to the Obligee, the bond will be automatically renewed.
Should the Surety determine, it will not to extend the bond for the renewal term, this will not constitute a contract default that could trigger a claim under the bond.
Why should Obligees call for and accept SAC’s renewable bond forms?
When an Obligee calls for bonds for fixed terms of three years or longer, many Principals will have difficulty obtaining Surety support. Obligees benefit from the SAC renewable bond forms because there would be more qualified bidders, thereby increasing competition.
Surety is a function of credit. Although underwriting criteria includes many aspects, the overall financial position of a contractor is key. As this position may vary over time, it makes providing fixed, long-term guarantees difficult. The surety underwriting process provides an advantage to the Obligee by ensuring only credible contractors qualify for surety support.
Who uses the SAC renewable bond forms?
Many governments and agencies across the country have already adopted SAC renewable bond forms as their standard security requirement on long-term service contracts. Copies of these bond forms can be found on the Surety Association of Canada’s website by clicking here.
Summary
The Surety Association of Canada strongly recommends the use of its renewable bond forms as the appropriate security for long-term service contracts. They allow for an increased number of qualified bidders, increased competition, and on-going underwriting services to ensure that contract obligations are met.