Also known as a warranty bond, a maintenance bond is used in the construction industry. The bond is designed to reduce risks, protect project owners and ensure that contractors perform quality work.
This means that contractors must use quality materials and adhere to fundamental building codes, construction standards and state construction laws until the project is completed. If a contractor fails to do so, the project owner can file a claim against a maintenance bond and receive payment.
Maintenance bonds are applicable to public construction projects. In some cases, private project owners may ask contractors to obtain a maintenance bond. These bonds are only valid for a specific time period. They can provide cover to a project owner for a limited time period. This is usually 12, 18 or 24 months.
If an issue arises during the specified time period, the project owner can file a claim and seek financial compensation (up to the bond amount). They cannot file claim once the bond is no longer valid.
Broadly speaking, the primary parties involved include:
- The principal (the contractor who is required to obtain the bond)
- The obligee (the project owner who requires the bond)
- The surety agency that issues the bond.
Evaluating the Cost of a Maintenance Bond
Maintenance bond cost is a percentage of the bond amount ($50,000 maintenance bond; $500 and $2000 premium).
A surety agency considers a number of factors to calculate the amount of the bond. These factors include but are not limited to:
- The amount of coverage required
- The principal’s experience in the construction industry
- The principal’s financial records (financial statements, including income statement, cash flow statement, etc.)
- The principal’s credit score
The higher a contractor’s credit score, the lower the bond premium will be. Generally speaking, you can expect a premium of 1 to 4 percent (of the total bond amount) if you have an excellent credit score. In case of low credit scores with poor financial history, the bond is not issued.
If you have any questions or need to apply for a maintenance bond, get in touch with us. With over 60 years of combined experience, our qualified underwriters can handle all the details and ensure you receive a maintenance bond as quickly as possible. We can help you obtain the best rates possible.