Understanding the Maintenance Bond
A maintenance bond, sometimes referred to as a warranty bond, is a type of surety bond that protects the owner of a completed project against defects in materials, workmanship and design that may arise after the completion of the job.
Like all other surety bonds, warranty bonds bring together three parties in a legally binding contract:
The principal, which is the business or individual who is doing the work.
The obligee, which is the entity for whom the work is being done.
The surety, which is the insurance company that backs the bond with a line of credit in case the principal cannot fulfill the task.
If a completed job proves to be defective at a later date, the obligee can make a claim on the bond for repairs to be made, which are paid for by the surety.
Why These Bonds Matter
Bonds differ from regular contractors insurance policies, but ultimately serve a similar purpose. A maintenance bond mitigates the risk a project owner undertakes when they hire a contractor, since they’ll be reimbursed if the contractor does subpar work.
Contractors can also benefit from having their work bonded. If it turns out that a contractor’s work proves to be faulty after it’s been completed, the surety that wrote the bond is responsible for making immediate reparations to the project owner. This way, contractors won’t have to reimburse clients with cash. Instead, they can repay the surety over a given period of time.
Usually, a maintenance bond is introduced into a contract after the work is completed. Since there is a fixed, limited timeframe on these bonds, they do not provide long-term maintenance solutions. If issues arrive after the bond has expired, the project owner must seek some other avenue of financial recourse from the contractor.
Are these Bonds Required by Law?
Depending on the location in which the project is being built, a bond may be required. Oftentimes, local, state and Federal government projects are the jobs for which warranty bonds are mandatory. Still, this differs between locations, so contacting an expert for assistance is always a wise move.