Maintenance Bond What it Means How it Works
Maintenance Bond: What it Means, How it Works
A maintenance bond is a surety bond purchased by a contractor to protect the property owner or landowner from the costs to remedy defects in a completed construction project.
Key Takeaways:
– Maintenance bonds protect contractors and property owners from liability for defects in a completed project.
– Maintenance bonds have varying time periods but are only active for that stated period and act as insurance policies on contractor workmanship.
– Maintenance bonds are required on most public and state construction projects.
Understanding Maintenance Bonds
A maintenance bond insures the owner of a completed construction project for a specified time period against defects and faults in materials, workmanship, and design that could arise later due to shoddy workmanship. Pricing a maintenance bond is different from pricing regular coupon paying bonds.
A surety bond is a three-way contract where a third party, called the surety, guarantees the contractual obligations of one party (the principal) to another party (the obligee) by agreeing to pay a sum to the obligee as compensation if the principal does not fulfill its obligations. The surety assures the obligee that the principal will perform the required tasks. A maintenance bond is a type of surety bond used by contractors.
Under the terms of a maintenance bond, the contractor of a construction project is the principal who purchases the bond, and the client (or owner) of the project is the party protected by the bond. Maintenance bonds are often required on state and public construction projects and, less often, on private construction jobs.
A maintenance bond is not technically insurance, but functions as an insurance policy on a construction project that promises a contractor will either correct any defects that arise or compensate the owner for those defects.
Maintenance Bond Requirements
The purchased maintenance bond remains active for a certain period of time. After this period, any financial loss from defects or issues found with the contractor’s work will not be covered. If a client finds defects in the structural framework of a completed construction project, they can file a claim against the bond during the maintenance term.
If the claim is found to be valid, the surety company will compensate the obligee for any losses and damages. In turn, the contractor must indemnify the surety for any compensation it provides to the obligee.
Before approving the purchase of a maintenance bond, the surety runs a credit check on the contractor to protect against insufficient funds to pay the surety after a claim has been approved and settled financially. Maintenance bonds also ensure fair compensation for poor workmanship by the contractor.
Overall, maintenance bonds provide assurance for property owners and contractors, protecting against the costs of defects in completed construction projects.
