A Maintenance Bond or Warranty Bond is a type of contract surety bond. A maintenance bond guarantees that a project will remain free from defects for a certain period of time. If a defect does occur, a contractor must correct it during the maintenance period or a claim can be made against the bond.
The contractor responsible for the maintenance is the Principal on the bond. The Obligee is the party receiving the bond and the party benefitting from the guarantee. The Surety is the third party bond company that is guaranteeing that the contractor will correct the work or the Surety will be responsible.
Maintenance Bonds can be written on a stand alone basis but are often written along with Performance Bonds and Payment Bonds. If contract bonds are required on a construction contract, the performance Bond guarantees the completion of the project, the payment bond guarantees that subcontractors and suppliers will be paid and the maintenance bond guarantees that the contractor will maintain the project for a period of time.
Written together, these three contract bonds provide great protection for an Obligee, whether the Obligee is a project owner or an upstream contractor.
One of the biggest considerations for maintenance bonds is the length of the maintenance guarantee. All things break down over time, even when built correctly. Surety Bond Companies do not want to be used as long term warranties. Additionally, a contractor's financial situation can change drastically over time. Therefore, the shorter the maintenance obligation, the easier these bonds are to get.
Most Surety bond companies prefer to write maintenance guarantees of twenty four months or less. However, different jurisdictions can also dictate what maintenance periods are required. For example, in Iowa a four year maintenance bond is standard on public road projects and Surety bond companies write these guarantees freely.
Obtaining maintenance bonds is similar to qualifying for other contract surety bonds. Bonds under $1 million and less than 24 months can be purchased instantly with only a personal credit check by clicking the button below.
There are alternatives to Maintenance Bonds when a project owner is looking for long term protection. One alternative is to pass the long term warranty obligation back to the manufacturer of a product.
This is very common in roofing contracts. Commercial roofing manufacturers often provide twenty year warranties on their products. However, the construction contract should specifically say that this guarantee is the responsibility of the product manufacturer and not the contractor.
These types of long term manufacturer warranties are also common in contracts for synthetic athletic fields and some types of specialty equipment.
Another alternative for owners looking for long term protection is to purchase Insurance. Some companies offer extended warranty insurance which is a better product to guarantee long term obligations.
The cost of a maintenance bond depends on whether it is written stand alone or with a performance bond, or payment bond. The cost is also dependent on how long the maintenance period is.
When a maintenance bond is written together with either a performance bond or payment bond, most contract surety bond companies will not charge extra for the maintenance bond provided the maintenance does not exceed twelve months.
For maintenance bonds longer than twelve months, there is a charge for each additional year. The charge is usually 0.1% - 0.3% each year.
This charge is also dependent on the type of work being guaranteed. For example, asphalt paving is considered less risky to maintain than general construction. Therefore, the maintenance bond cost for an asphalt paver is usually lower than that of a general contractor involved in building construction.
Maintenance Bonds written on a stand alone basis without a performance bond or payment bond are priced differently. The rate manual for the Surety and Fidelity Association of America says these bonds should be priced at 75% of The Miscellaneous Bond rate. That means the cost of a stand alone maintenance bond is about 1% of the contract price.
You can read more about contract bond costs here.
Maintenance Bonds like all Surety bonds require indemnity. Indemnity means that if the Surety bond company pays a valid claim on a maintenance bond, the company and indemnitors agree to reimburse the bond company. This is a major difference between Surety bonds and insurance. You can read more about indemnity here.