Maintenance Bonds

These bonds guarantee that the project owner (the obligee) will not have to bear the cost of repairing or redoing work that does not meet the contractually required construction standards or state or local building codes. The problem may be the result of a materials issue, design issue, or poor workmanship. In the maintenance bond construction relationship, the contractor (the principal in the bond arrangement) can only be held responsible for their own work, the work of their subcontractors, or their use of materials that did not meet the specifications included in the contract. For example, if the principal was not involved in the project’s design phase but simply executed a design provided by the project owner, the principal’s maintenance bond would not cover defects resulting from design flaws.

The warranty bond construction coverage will specify the period of time during which this coverage must remain in effect. The coverage period is typically 12, 18, or 24 months. Any flaws that are detected after that period ends would not be covered. In the event of a claim, the surety company will investigate. If the claim is determined to be valid, the surety will make payment up to the full penal amount of the bond. For maintenance bond construction projects, the contractor must then reimburse the surety for that amount.

The obligee establishes the required dollar amount of the bond, which is based largely on the dollar amount of the initial construction contract. The contractor will pay only a small percentage of that amount as the premium or cost of the maintenance bond. The surety establishes the premium rate for each applicant on a case-by-case basis, depending on the applicant’s credit history and financial condition. In addition to checking the applicant’s credit score, the surety may want to see personal and business financial statements. For warranty bond construction coverage, the premium rate for applicants in good financial standing is typically in the range of 0.25 to 1.5%. So, for instance, a $100,000 bond would cost the principal somewhere between $250 and $1,500. Additionally, a surety may offer a better rate for contractors who obtain both a performance bond and a maintenance bond at the same time. For example, when a performance bond is required the maintenance bond rate is typically in the range of 0.25% - 0.5%. When a maintenance bond is required on its own, the bond rate is typically 0.75% - 1.5%.