Surety Bond Professionals is a family owned and operated bonding agency with over 30 years of experience. With access to a broad range of surety markets, our expert agents are ready to assist with all of your construction bond needs.
What Are They?
Some construction defects may not become apparent for months or even years after project completion. Colorado maintenance bonds ensure that the project owner has some recourse other than bearing the full cost of making necessary repairs if that should happen.
Most often, that protection extends for a period of 12 or 24 months after the date a project is completed. If construction defects surface before the end of that period, the project owner (the bond’s “obligee”) can file a claim against the maintenance bond provided by the contractor (the bond’s “principal”).
Who Needs Them?
Whether or not to require a maintenance bond is up to the project owner. Purchasing a maintenance bond is a common requirement for contractors working on taxpayer-funded public works projects. And maintenance bonds are increasingly being required by private project owners.
How Do They Work?
A Colorado maintenance bond brings together the aforementioned obligee and principal with a third party—the bond’s guarantor, known as the “surety.”
The obligee establishes the required bond amount based on the financial protection needed. This is the “penal sum,” the maximum amount available to pay claims against the bond. The obligee also sets the bond’s term—the number of months of protection for the obligee after project completion.
The principal is legally obligated to pay all valid claims for the entire term of the bond. The surety determines whether each claim is valid and must be paid.
The surety, as the bond’s guarantor, will lend the principal the funds needed to pay a valid claim, but not by handing money over to the principal. Instead, the surety will pay the claim initially on behalf of the principal. The principal must repay that debt according to the repayment schedule set by the surety. Failing to do so may force the surety to take legal action against the principal to recover the funds.
What Do They Cost?
Colorado maintenance bonds are surprisingly affordable because they’re sold for an annual premium that is only a small percentage of the penal sum. That percentage, the premium rate, is set on a case-by-case basis through the surety’s underwriting process.
The underwriters assess the risk of the surety not being repaid for claims paid on the principal’s behalf. The metric commonly used is the principal’s personal credit score—a universally accepted measure of creditworthiness and financial responsibility.
A high credit score is a reliable indication of a low risk of non-repayment and earns the principal a low premium rate. On the other hand, a low credit score suggests that the risk to the surety is considerably higher, resulting in a higher premium rate.
A well-qualified principal typically will be assigned a premium rate in the range of 0.5 to 3 percent.
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