Performance Bonds and Construction Liens: What Boards Need to Know Before a Big Project Goes Sideways

Your board is about to sign off on a garage restoration worth well over a million dollars. Before anyone signs anything, there are two risks every director needs to understand: what happens if the contractor cannot finish the job, and what happens if a subcontractor doesn't get paid. Both can hit your corporation harder than most boards expect.

What a performance bond actually protects you from

A performance bond is a three-party guarantee between your condo corporation, the contractor, and a surety company. If the contractor goes bankrupt, walks off the job, or otherwise fails to complete the work, the surety steps in to either fund a replacement contractor to finish the project or compensate the corporation for the cost of completing it. It is not insurance in the traditional sense. It is a guarantee that the job gets finished one way or another.

The contractor pays for the bond, but the cost gets built into their price, so the corporation is effectively paying for it either way. In Ontario, performance bond premiums typically run between roughly 0.5 percent and 4 percent of the total contract value, according to industry sources like St. Andrews Insurance, depending on the contractor's financial strength and track record. Bond coverage itself is usually set at either 50 percent or 100 percent of the contract value.

Here is the real cost-benefit math boards need to run. On a large capital project, a few thousand dollars in bonding cost is a small price against the risk of a half-finished garage restoration and a contractor who has gone under. Ontario's own Construction Act requires performance bonds on public contracts over $500,000, and that threshold is a useful benchmark for private condo projects too. If your project is anywhere near that size, a performance bond should not be optional. It should be a standard line item your consultant builds into the tender requirements from the start.

Why liens are a different kind of risk entirely

A construction lien works differently from a performance bond, and it is arguably the more dangerous risk for individual owners. Under Ontario's Construction Act, if a subcontractor, supplier, or worker on your project does not get paid by the general contractor, they have the right to register a lien against the property. On a condo project, that lien does not just attach to the corporation's common elements. It can attach to the title of every single unit in the building, whether or not that unit's owner had anything to do with the dispute.

That means an owner trying to sell or refinance their unit could suddenly find a lien registered against their title over a payment dispute they were never part of and never even knew was happening. This is one of the reasons boards need to take holdbacks seriously. The Construction Act requires owners to hold back a percentage of each payment certified to the contractor, generally 10 percent, for a set period after the work is substantially performed. That holdback exists specifically so there is money available to satisfy liens if a sub or supplier does not get paid further down the chain.

What your board should actually do about this

Do not treat bonds and holdbacks as boilerplate your consultant or lawyer will simply handle in the background. Ask your consultant directly whether the tender requires a performance bond and at what percentage. Ask your lawyer to confirm the holdback provisions in your supplementary conditions match the current requirements under the Construction Act, since the rules around holdback periods and lien registration deadlines are specific and unforgiving if missed.

It is also worth asking your property manager or lawyer for a lien search before final payment is released to the contractor, to confirm no liens have been registered that the corporation is unaware of. Given that a single unpaid subcontractor can create a title problem for every owner in the building, this is not a step to skip on a large project.

Safeguards You Need in Place

A performance bond protects the corporation against a contractor who cannot finish the job. Holdbacks and proper lien procedures protect every single owner's title from a payment dispute further down the supply chain. Neither costs much relative to the size of a major capital project, and both are the kind of protection you only appreciate once something has already gone wrong. Build them into your tender requirements and your supplementary conditions from the start, and confirm with your lawyer and consultant that both are handled properly before the first payment goes out.

Related Reads

●     Procurement Made Simple: How Self-Managed Condos Can Avoid Costly Mistakes When Hiring or Buying

●     Condo Boards, Meet Your Ally: The CMRAO Explained