12.11.1 General. Part II of the Government Contracts Regulations deals with securing the due performance of contracts. The contracting authority is to determine the need for and amount of financial security, subject to the Regulations, policies and Related requirements.
12.11.2 The following is the policy on financial security and the use of insurance in contracting. For more details, see Appendix R which contains the Policy on the Use of Standby Letters of Credit as an Alternative to Bid or Contract Security for Federal Government Contracts.
12.11.3 Financial security. The various forms of financial security exist to ensure that the contractor's obligations under the contract are carried out, to protect the interests of subcontractors, sub-subcontractors and suppliers, and to protect the Crown against loss should a low bidder fail to enter into a contract. The principal traditional techniques are holdbacks, security deposits and surety bonds. When security is obtained, contracting authorities will apply the procedures for the handling of bonds and security deposits set out in the Government Contracts Regulations.
12.11.4 Form and amount of security. The bidder or contractor has the option to submit a security deposit in the form he or she wishes to provide, however, the following criteria can be used as a guide to determine the form and amount of security:
1. the type of work and the custom of the trade or profession;
2. the consequences of the failure or inability of the contractor to fulfill contractual obligations;
3. before solicitation of bids, the stability of firms likely to compete for the contract. As a general rule, the more elaborate the prequalification of prospective contractors, the less the need for security in the contract;
4. after solicitation of bids, the capability of the specific contractor, including (as deemed applicable and available) the financial structure, performance record, payment record, credit rating and availability of cash in relation to commitments.
As specified in the definitions in the Government Contracts Regulations, a security deposit may be a bill of exchange payable to the Receiver General and certified by an approved financial institution on itself, a government guaranteed bond which is convertible to cash, or any other form of security acceptable to the contracting authority and approved by the Treasury Board. The only other forms of security that have been approved for general use are bid and contract surety bonds and claimant's payment bonds issued by acceptable bonding companies and irrevocable standby letters of credit which have been issued by a financial institution which is a member of the Canadian Payments Association.
Contracting Authorities should not specify in the request for proposals or tender call the type of security to be submitted.
12.11.5 Holdbacks. Holdbacks serve two purposes:
1. to provide an incentive for the contractor to complete the work according to the stipulated specifications; and
2. to provide the Crown with access to funds for commitments resulting from a contractor's non-performance.
Negotiated holdbacks should be large enough and last long enough to ensure that all contractual requirements can be met. This can be determined by assessing the firm's financial capability, performance record, payment record, markets or industry volatility and the degree of risk inherent in the work.
12.11.6 Security deposits. The contracting authority determines the amount of the deposit required and ensures that the actual deposit is acceptable under the Government Contracts Regulations (see Part II of the Regulations, sections 10 to 17, concerning the procedures governing these instruments. See also the Comptrollership policies. When cash, certified cheques, other bills of exchange, letters of credit, or government-guaranteed bonds are submitted as contract security, the contracting authority usually specifies a minimum of 10% of the value of the contract. Surety bonds are usually required to have a total value of 100% of the value of the contract. In construction contracts, the amount of security provided by surety bonds is usually 50% of the total value of the contract in a performance bond, 50% of the total value of the contract in a labour and material payment bond, and the total value of the claims in a claimant's payment bond. When government guaranteed bonds a resubmitted as security, their value should be current value, not necessarily face value.
12.11.7 Surety bonds. If surety bonds are proposed by the bidder or contractor and are acceptable to the contracting authority, the appropriate model bond form should be used for consistency and uniformity. Model forms for bid bonds, performance bonds and payment bonds have been approved by Treasury Board for use in construction contracting and are shown in Appendix S. A list of insurance companies whose bonds (regardless of purpose) are accepted by the government is contained in Appendix L, which is revised as required.
12.11.8 Bid security. The amount required as bid security is also determined by the contracting authority as guided by the traditions or customs generally followed in the type of contracting being undertaken. For construction contracts the following bid and contract security is usually requested by the contracting authority:
1. For bid security when the amount exceeds $30,000
o if the security is a bill of exchange or a government guaranteed bond, 10 percent of the amount bid up to a bid total of $250,000. If the bid exceeds $250,000, the foregoing amounts are requested plus 5 per cent of the amount in excess of $250,000.
2. if the security is a surety bond, 10 per cent of the amount bid.
12.11.9 Normally, neither a bid bond nor a security deposit protects against the withdrawal of an offer before its acceptance, unless the offer is made under seal. The model bid bond form contains a provision obligating the bonding company to compensate the Crown for higher costs in case of withdrawal, but does not provide a basis for legally enforcing entry into the contract. Where use of the model form is not appropriate or where contracting authorities judge it to be in the public interest to require the additional protection of offers made under seal, assistance of legal officers should be sought in preparing bidding documents. (The seal concept does not apply in Quebec, but the bidder who undertakes to keep an offer open for a specified period of time cannot withdraw the offer without becoming exposed to a damage claim.) If a security deposit is made, withdrawal of an unsealed tender before acceptance entitles the tenderer to the return of the deposit.
12.11.10 Provision for damages or penalty payments. A clause referring to provisions for damages or penalties, where applicable, should be included in contracts. Legal advice should be sought concerning the types of damages or penalties which could be included and wording of the clause.