Contract Performance Guarantees

A contract performance guarantee is a form of performance security obtained at the outset of a contract to secure the contractor's due and proper performance. In Canadian federal guidance, a guarantee of performance is security obtained from a third party, such as a bank or an insurance company. If the contractor fails to perform, that third party compensates the Government for losses caused by the contractor's non-compliance and arranges completion of the contractor's obligations under the contract.

The federal Practitioner's Guide for Pricing, published on CanadaBuys, uses the terms "performance securities" and "guarantee of performance". A guarantee is one of three recognized forms of performance security, alongside security deposits and performance bonds. Its purpose is to protect the contracting authority if the contractor defaults after award. The guide is available on CanadaBuys.

How a guarantee of performance works

A guarantee of performance places a financially capable third party behind the contractor's promises. The Government does not need to rely only on the contractor's own resources if something goes wrong. When the contractor does not perform, the bank or insurer has two roles under the guarantee. It compensates the Government for losses attributable to the non-compliance, and it arranges completion of the contractor's obligations.

The protection therefore covers both the financial loss and the delivery of the work itself. This is what separates a guarantee from a simple deposit, which only gives the Government money if the contractor fails.

The three forms of performance security

The federal pricing guide identifies three forms of performance security:

• Security deposit: a deposit provided to the Government, such as a standby letter of credit or certified cheque. It is returned if performance is achieved and forfeited if the contractor fails to perform.
• Performance bond: a surety-backed instrument securing the contractor's performance.
• Guarantee of performance: a third-party undertaking, typically from a bank or insurance company, to compensate the Government and arrange completion if the contractor does not perform.

When performance security applies

The guide states that performance securities may be used at the outset of a contract or construction phase. They can be used in both competitive and non-competitive contracts, and they can apply regardless of the contract's basis of payment. The guide also notes that performance securities are used in Canada, the United Kingdom, the United States and Australia.

This means a requirement for security is not tied to one type of procurement. Whether a given contract calls for it is set out in the solicitation and the resulting contract.

Related federal forms: bid bond 504 and performance bond 505

Public Services and Procurement Canada publishes two forms that show how performance security operates in federal procurement. The PWGSC-TPSGC 504 bid bond form provides that, in the circumstances stated in the tender, a successful bidder must provide a performance bond and a labour-and-material payment bond. Each is in the amount of 50% of the contract price, or the bidder may provide other security acceptable to the Crown.

The PWGSC-TPSGC 505 performance bond form sets out what the surety must do once the contractor is declared in default. The surety must remedy the default, complete the work, or assume specified financial responsibility for completion costs, subject to the bond's terms and limits.

What it means for a supplier bidding on Canadian public contracts

The obligations depend on the solicitation and the resulting contract. Where a solicitation requires performance security, the supplier must provide the specified instrument, whether a performance bond, guarantee, security deposit or other acceptable security. It must be provided within the stated deadline and in the required amount and form.

Suppliers should also confirm that their surety, bank or insurer can satisfy the instrument's conditions if the supplier defaults. Bid teams should read the security requirements early, so that the arrangements with the bank or insurer are in place before the deadline.