In A Performance Bond Context, What Is A Maintenance Bond?

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Before you fully understand what a maintenance bond is, you should first understand it in a specific context. That context should be within the definition of a performance bond in the real estate industry.

What is a performance bond?

A performance bond is a guarantee given by a third-party that protects the project owner in case the contractor doesn’t perform his or her duty as stated in the contract. A performance bond, or a contract bond, is used to pay the project owner if ever the contractor defaults or becomes bankrupt throughout the duration of the project.

Performance bonds weren’t always there to protect project owners. It was only when the Miller Act was passed and approved that performance bonds became required for public projects that cost at least $100,000. There are also cases when private projects needed a performance bond. Those who are required to have this guarantee would have to go through a public bidding wherein the contractor that bids the lowest cost is awarded the project. When the contractor is selected, he or she will then pass a payment and performance bond.

What then is a maintenance bond?

Once the contractor is selected, a maintenance bond or a warranty bond is asked by the project owner. This kind of bond protects the project owner in case the contractor does his job unsatisfactorily. Similar to performance bonds, a third-party, such as a bank or a financial institution, is needed to give the written guarantee itself.

For most public projects, maintenance bonds are required. However, if it’s a private project, it is in the preference of the project owner if he will ask it from the contractor. Thus, private projects can choose not to have a maintenance bond from the contractor.

A maintenance bond will not apply forever. There is only a specific time frame for it to be applicable, such as a few years after the project has been completed. This is allotted to give time for the project owner to check and test the quality and durability of the project that was built. Once that time has elapsed, the contractor is no longer obliged to pay for the financial losses of the project owner brought about by defects in the building.

Some FAQs Regarding Maintenance Bonds

 

  1. How much does a maintenance bond cost?

The final price of a maintenance bond is determined by several factors. The most common factor would be the credit score. Contractors, which in this case would be called ‘principals’, that have a high credit score have a higher chance of getting a lower premium to pay.

There are other factors considered such as the total cost of the project, the financial status of the contractor’s business, and the previous projects done by the contractor. Banks and financial institutions may also ask you for your financial statements so they can better evaluate the bond they will give.

  1. How do you get a maintenance bond?

Once you get chosen as the contractor, you’re going to have to apply for a maintenance bond. Most companies like¬†https://swiftbonds.com/bid-bond¬†have online guides and forms that will help you get a maintenance bond. The site also contains more information about maintenance bonds.

Once you fill out the forms and send the necessary documents, the company will already evaluate you and your financial background. All you have to do is wait for their answer.

  1. What happens when there is an unsatisfactory project?

When the project owner sees a defect or a substandard make in the project, they have the right to file a claim on the maintenance bond. The project owner then gets the bond and the contractor is supposed to reimburse the costs incurred.

If you would notice, surety bonds like performance and maintenance bonds are created to protect the project owner. These bonds will become the owner’s fall back whenever a contractor fails to do his part in the contract.