Maintenance Bond

What Is a Maintenance Bond?

A maintenance bond is a type of surety bond purchased by a contractor to shield the property owner or landowner from the costs to cure a completed construction project's imperfections.

Understanding Maintenance Bonds

A maintenance bond "protects" the owner of a completed construction project for a predetermined time frame period against deformities and flaws in materials, workmanship, and design that could emerge later due to disgraceful workmanship. Notwithstanding, pricing a maintenance bond is totally different from pricing ordinary coupon paying bonds.

A surety bond is a three-way contract where an outsider, called the surety, guarantees the contractual obligations of one party (the principal) to another party (the obligee) by consenting to pay a sum to the obligee as compensation in the event that the principal doesn't satisfy its obligations. The surety guarantees the obligee that the principal will perform the required tasks. A maintenance bond is a type of surety bond utilized by [contractors](/self employed entity).

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 for which the contractor was recruited to deal with is the party that is protected by the bond. Maintenance bonds are many times required on state and public construction projects and, on rare occasions, on private construction occupations.

A maintenance bond isn't technically insurance, however fundamentally works as an insurance policy on a construction project that guarantees a contractor will either address any deformities that emerge or that the owner is compensated for those imperfections.

Maintenance Bond Requirements

The maintenance bond that is purchased stays active just for a certain period of time, after which, any financial loss from deformities or issues found with the contractor's work won't be covered by the bond. In the event that after the completion of a construction project, say a building, the client observes that the structural system was not satisfactory, it could file a claim against the bond during the maintenance term.

In the event that the surety company views the claim as substantial, it will repay the obligee for any losses and damages incurred. Thusly, the contractor must [indemnify](/repayment technique) the surety for any compensation it makes to the obligee.

A contractor that tries to purchase a maintenance bond will have its credit check run by the surety before the bond purchase is approved. This is to safeguard the surety against an event in which the principal has deficient funds to pay the surety after a claim has been approved and settled financially. What's more, maintenance bonds guarantee that the owner of a construction project is genuinely compensated for poor workmanship by the contractor.

Features

• Maintenance bonds can have shifting time spans yet are just active for that stated period and, basically, act as insurance policies on contractor workmanship.
• Maintenance bonds are required on generally public and state construction projects.
• Maintenance bonds safeguard a contractor and property owner from financial liability due to deserts found toward the completion of a project.