Surety Bond Professionals is a family owned and operated bonding agency with over 75 years of experience. With access to a broad range of surety markets, our expert agents are ready to assist with all of your maintenance bond needs.
What Are Alabama Maintenance Bonds?
An Alabama maintenance bond is a contractor’s guarantee against defects in materials or workmanship that may arise after a construction project is completed. The purpose of a maintenance bond is to protect the project owner (the “obligee”) from incurring additional costs due to faults that become apparent only after the construction has been accepted. The bond ensures that the contractor (the bond’s “principal”) will return to repair or replace any defective components discovered during the maintenance period specified in the bond. A third party (the “surety”) guarantees payment of a valid claim filed by the obligee when the principal fails to live up to this obligation.
Who Needs Them?
There is no federal or state statutory requirement for maintenance bonds. However, both public and private project owners can require them for their own financial protection and the long-term quality and functionality of the work completed. If you are required to furnish a maintenance bond, the obligee will inform you of the necessary bond amount and the length of the maintenance period. (Most often, this is one or two years.)
How Do Alabama Maintenance Bonds Work?
If defects are discovered during the maintenance period, the obligee can file a claim against the maintenance bond. If the surety’s investigation determines that the claim is justified, the principal is legally obligated to correct the defects or pay for the necessary repairs. The surety guarantees the satisfactory completion of repairs or payment of the claim up to the bond amount.
The surety’s guarantee is actually an agreement to lend the principal the funds to pay the obligee if the defects will be corrected by a different contractor. The normal practice is for the surety to pay the obligee directly at first as an extension of credit to the principal. The principal must then repay the debt according to the surety’s credit terms. Not repaying the surety is likely to result in legal debt recovery actions against the principal.
How Much Do They Cost?
The premium cost of an Alabama maintenance bond is the product of multiplying the bond amount established by the obligee and the premium rate set by the surety. The bond amount is tied to the contract price, and the premium rate is based on the risk of the surety not being repaid for a claim paid on the principal’s behalf. The surety measures this risk using the principal’s personal credit score.
The higher the principal’s credit score, the lower the risk to the surety, and the lower the premium rate will be. The reverse is also true. A low credit score warrants a higher premium rate to offset the greater risk to the surety.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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