Insurance, bonding and running the business

The electrical contractor licence is the cheapest thing Gallant Electric will buy in its first year. The registrations, insurance, workers compensation and tax accounts that surround it cost far more and matter just as much. Some of them are legal requirements; others are requirements in practice, because customers, general contractors and suppliers will not deal with a contractor who lacks them. This lesson walks through what an Island electrical contractor needs, which items the electrical regulations themselves require, and which come from somewhere else.

A note on what was verified. The government's licensing pages and the consolidated regulations do not list an insurance or bonding requirement for an electrical contractor licence on the Island. That is different from provinces such as Saskatchewan, where a surety bond is a licensing condition. Where this lesson discusses insurance and bonds, it is describing what contractors commonly carry and what contracts commonly require, not a licensing rule. Confirm current requirements with Inspection Services and your insurer.

The registrations

• Business registration. Gallant Electric Ltd. was incorporated through the province's corporate registry. A sole proprietor trading under a business name registers the name. The registry record is what lenders, suppliers and some customers will ask to see.
• Federal business number. The Canada Revenue Agency issues a business number, with program accounts for payroll deductions and sales tax. Prince Edward Island uses the harmonized sales tax, administered federally, so Gallant Electric's sales tax account is with the CRA.
• Workers compensation. An Island employer in the construction industry registers with the Workers Compensation Board of PEI and pays assessments based on payroll. Lesson 10 covers WCB in detail. General contractors routinely ask subcontractors for proof of WCB coverage, or a clearance letter, before paying them.
• Municipal business licensing. Some municipalities require business licences or registrations; many on the Island do not. Check where the business is based.

Insurance

No electrical contractor should work without commercial general liability insurance, whether or not a regulation requires it. A single fire caused by a loose connection can cost far more than a small contracting company is worth. Natalie's insurance broker walks her through the usual coverages for a contractor of her size.

General contractors and institutional owners commonly require subcontractors to carry liability insurance at a stated minimum limit, name the owner or general contractor as an additional insured, and provide a certificate of insurance before starting. Those requirements come from the contract, not from the electrical regulations, but they are just as binding once Natalie signs.

Bonds

A surety bond is a three-party promise. The surety company promises the obligee, usually an owner or general contractor, that the contractor, called the principal, will perform. If the contractor does not, the surety pays and then recovers from the contractor. Bonds are not insurance for the contractor; they protect the other side.

The Island's electrical licensing rules, as consolidated and as described on the government's pages, do not require a licence bond. Natalie will meet bonds instead on larger jobs, particularly public work.

• Bid bonds guarantee that a contractor who wins a tender will sign the contract.
• Performance bonds guarantee that the contractor will complete the work.
• Labour and material payment bonds guarantee that the contractor will pay its workers and suppliers.

To get bonded, a surety looks at the contractor's finances, experience and track record. A new company like Gallant Electric will usually start small, often with the owner personally guaranteeing the surety, and build bonding capacity over years.

Pricing the work

Natalie's biggest risk in her first year is not a defect or an inspection. It is pricing jobs badly. MELC-106 covers estimating in depth; the Island version of the problem is the same as anywhere. Every quote must cover materials, labour, overhead and profit, and the overhead must include all the items in this lesson.

The most common mistake new contractors make is confusing markup with margin. Markup is added to cost; margin is the share of the selling price that is profit and overhead. A 25 in 100 markup on cost is only a 20 in 100 margin on price. The calculator below shows the difference for a heat pump job.

def price_from_markup(cost, markup):
    return cost * (1 + markup)

def margin(price, cost):
    return (price - cost) / price

cost = 6400.0              # materials and labour for a ducted heat pump job (illustrative)
for markup in (0.15, 0.25, 0.40):
    p = price_from_markup(cost, markup)
    print(f"markup {markup:.2f}: price {p:9,.2f}  margin {margin(p, cost):.3f}")

markup 0.15: price  7,360.00  margin 0.130
markup 0.25: price  8,000.00  margin 0.200
markup 0.40: price  8,960.00  margin 0.286

If Gallant Electric needs 0.20 of every dollar of sales to cover overhead and profit, it needs a markup of 0.25 on cost, not 0.20. Sam builds that into the quoting spreadsheet so nobody has to do the arithmetic on a customer's doorstep.

Cash flow and holdbacks

Island construction contracts are subject to the Mechanics' Lien Act holdback, covered in Lesson 9. Owners must retain part of the contract price for a period after the work is completed. For a small contractor, that means part of every larger job's revenue arrives weeks or months after the work is done, while payroll and supplier bills arrive on time. Natalie and Sam plan for it: a line of credit, supplier terms negotiated before the first big job, and a rule that no single job may tie up more than a set amount of the company's cash.

Equipment the business installs that others regulate

Heat pump work is a large part of Island electrical contracting, and it touches other trades. Refrigerant handling requires the appropriate refrigeration certification, and connecting gas appliances requires gas certification. The electrical contractor licence covers the electrical work only. Natalie partners with a refrigeration contractor for the refrigerant side and does the electrical supply, disconnect and controls herself. Each contractor takes out its own permits.

A worked example: a general contractor's paperwork

Building a simple business plan

Before she leaves Harbourside, Natalie writes a two-page business plan. Wayne insists, not because a bank asked for it but because writing it forces decisions. Who are the customers? What work will the company take, and what will it turn down? How many billable hours can three people realistically produce in a year, after travel, quoting, paperwork and bad weather? What does the company need to charge per hour to cover wages, overhead and profit?

The billable-hours question surprises Natalie most. On paper, three people working forty hours a week for fifty weeks produce six thousand hours. In practice, after travel between jobs across the Island, quoting, ordering, inspections, training and the slow weeks after Christmas, Wayne's experience is that a small company bills perhaps two thirds of that. Pricing as if every hour is billable is the fastest way to work hard and lose money.

Choosing the work

A new contractor's first instinct is to take every job. Wayne's advice is to choose. Some work is profitable and builds a reputation: service upgrades, heat pumps, renovations for repeat customers. Some work ties up cash and carries risk: large subcontracts with long holdbacks, or jobs for general contractors with a history of slow payment. Natalie decides that in her first year, no single job will be larger than she can carry through the 60-day holdback without straining the company's cash.

The accountant and the broker

Two professionals pay for themselves for almost every new contractor: an accountant who works with trades, and an insurance broker who places contractor coverage. The accountant helps choose the business structure, sets up the tax and payroll accounts, and keeps the company out of trouble with the Canada Revenue Agency. The broker matches insurance to the work the company actually does and reads the insurance clauses in contracts before Natalie signs them. Natalie meets both before she applies for the licence.

Wayne's last piece of advice on the business side is to pay himself a regular wage from the start, even a small one, and to keep the company's money separate from his personal money. He says that habit, more than any other, separates contractors who last from those who do not.

Quoting on the Island

Distance matters more on the Island than newcomers expect. A job in Souris is about two hours from Summerside, and a job in Tignish is about an hour the other way. Travel time is paid time, and fuel and vehicle costs are real. Natalie's quoting spreadsheet adds a travel allowance based on distance from Summerside, and she groups jobs by area where she can, so that a week's work in Kings County is done in one or two trips rather than five.

Seasonality matters too. Cottage and tourism work peaks before the summer season, heat pump work peaks in the autumn, and new construction slows in the depth of winter. A contractor who plans for the slow months, by setting aside cash in the busy ones and lining up winter renovation work, avoids the cash crunch that catches many new businesses in their first January.

Finally, Natalie prices the paperwork. Permit applications, inspection scheduling, certificates of compliance and holdback tracking all take time. On a small job they can take as long as the wiring. Wayne says contractors who do not price the paperwork end up doing it for free in the evenings.

Natalie reviews her prices every six months against her actual costs. Wire, breakers and heat pump parts change price often, and a quote template built on last year's costs quietly eats the margin on every job.