Financial Security Clause

A financial security clause is a contractual provision that requires a contractor to provide financial security after contract award. The security protects the government if the contractor does not fulfil its contractual obligations. Depending on the contract, it can take the form of a performance bond, a labour and material payment bond, or a security deposit.

In Canadian federal procurement, the same idea appears as financial security and contract financial security. CanadaBuys describes contract financial security as security meant to ensure that a contractor fulfils its obligations. The wording of the clause sits in the Standard Acquisition Clauses and Conditions (SACC) Manual, under the section titled E, Financial Security. See the SACC Manual clause for the standard text.

Forms of security the clause can require

The SACC clause lists the possible forms of contract security. These are a performance bond, a performance bond together with a labour and material payment bond, a labour and material payment bond alone, or a security deposit. The contracting officer inserts the applicable percentage of the contract price when the clause is placed in the solicitation and resulting contract.

The clause requires the successful contractor to provide the security within a stated number of calendar days after contract award. Bonds must be issued by a bonding company that appears on the applicable list of companies licensed to provide surety in Canada. CanadaBuys also notes that offerors may choose the form of financial security they provide, within the acceptable forms Canada specifies. Details are on the CanadaBuys financial security page.

Offer security, contract security and payment bonds

CanadaBuys identifies three types of financial security, and each does a different job.

• Offer financial security protects Canada if an offeror fails to enter into a contract.
• Contract financial security ensures that the contractor fulfils its obligations. This is the type a financial security clause normally addresses.
• Payment bonds protect subcontractors and material suppliers.

The types are linked. For a successful offeror, offer financial security is not released until the required contract financial security has been provided.

When buyers decide to require it

Contracting officers must decide whether financial security is required before they issue a competitive solicitation. When it is required, the appropriate clauses go into both the solicitation and the resulting contract, and the mandatory requirements must be clearly specified.

For construction, the rule is firmer. Contract financial security must be sought for construction contracts with an estimated value above $500,000 CAD, as set out on the CanadaBuys financial security page.

What happens if the contractor defaults

The archived federal Contracting Policy states that when a contractor defaults, contract financial security may be redeemed and applied to compensate the Crown, within the limits permitted by the contract. The security is therefore a practical remedy the Crown can draw on, not a formality. The policy text is available from the Treasury Board Secretariat.

What it means for a supplier bidding on Canadian public contracts

Read the solicitation to see whether financial security is required and in what form. Check the number of calendar days allowed after award, the percentage of the contract price, and which forms the buyer accepts. Bonds must come from a surety licensed in Canada, so arrange access to one before you bid, especially on construction work. If the bid also requires offer financial security, expect it to be held until your contract security is in place. Build the cost and lead time of this security into your pricing and your post-award schedule.