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 California Maintenance Bonds?
The purpose of a California maintenance bond is to protect a project owner from the cost of remediating construction defects that don’t surface until after a construction project has been completed and accepted. The contractor must repair defects discovered within the maintenance period (usually 1-2 years after project completion) at no additional cost to the project owner (the bond’s “obligee”).
If the contractor (the bond’s “principal”) does not make the necessary repairs, the bond ensures that the principal will compensate the obligee for the costs incurred by having the repairs made by another contractor. A third party (the “surety”) guarantees payment of the obligee’s claim up to the full bond amount.
Who Needs Them?
California is one of the few states that has a statutory requirement for maintenance bonds for public works projects. According to California Public Contract Code Section 3241, a one-year maintenance bond is required for all public works contracts awarded by state agencies. This bond must be for 10% of the total contract amount.
While private construction projects are not subject to the statutory requirement, it’s not uncommon for private project owners to request a maintenance bond as a condition for being awarded a contract.
How Do California Maintenance Bonds Work?
The basic concept underlying a maintenance bond is that the surety will extend credit to the principal for the purpose of paying a valid claim. (The surety is responsible for determining the claim’s validity.) If the principal can’t pay a claim immediately, the surety will pay it on the principal’s behalf. The principal must then repay the resulting debt in accordance with the surety’s credit terms. Failing to repay the debt typically results in the surety taking the principal to court to recover the funds.
How Much Do They Cost?
The premium cost of a California maintenance bond is calculated by multiplying the bond amount set by the obligee by the premium rate. The surety sets the premium rate based on the risk of the principal not repaying the surety for the credit extended in paying a claim. The underwriters use the principal’s personal credit score to measure that risk.
A financially responsible individual typically has a high credit score, which is considered reliable evidence of low risk to the surety. Low risk makes a low premium rate appropriate. Someone with a lower credit score presents higher risk for the surety, which calls for a higher premium rate to offset the elevated risk.
A well-qualified principal typically will be assigned a premium rate in the range of .5% to 3%.
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