Maintenance Bond

A maintenance bond is a type of surety bond purchased by a contractor as protection for when work is completed. These are a three-way contract in which a third party provides a guarantee that the obligations under a contract will be fulfilled. If the contract is not fulfilled, the third-party guarantor is obligated to pay compensation to the obligee for the failure of contract completion by the principal.

Bonds are purchased by a contractor, such as in a construction project, making the contractor the principal in the arrangement. Clients of the contractor are the obligees. In many areas, these bonds are required as part of regulations for construction work as a form of protection for the parties involved. Though this type of bond is not insurance, it serves as a kind of insurance for the completion of a project or compensation if the project is not completed appropriately.

Though the maintenance bond is a kind of surety, there are no additional types of maintenance bonds. These bonds are used for construction. If there is a different need for a bond, the individual or company would use a different type of surety bond for their needs.

The purpose of this type of construction bond is to protect the client in construction work. Not only do bonds ensure that the physical work itself is completed, but they also ensure that the physical work is completed satisfactorily. Once the job is completed, the bond ensures that the work is of sufficient quality to meet the terms of the contract. This includes defects in the design of the job, faults in the workmanship of the project, and other problems that arise after the project has been completed. The length of time bonds are active following the completion of a project is included in the parameters of a bond.

Through bonds, a client will receive a project that meets the contract parameters and does not include problems that the client will simply have to deal with or pay extra to have fixed. If these types of problems arise, the guarantor is obligated to compensate the client based on the terms of the bond. As a result, even if the job itself is not satisfactory, their client will have compensation that can be used to fix problems using another contractor. Most often, these bonds are used in public and state construction projects. However, they can be used in private construction projects, as well. This is less likely to occur. This kind of surety is not used for the contractor's company, such as to make improvements or expand operations. Bonds are specifically used as a way to ensure that the contractor fulfills the contractual obligations established with the involved client.

Another purpose of this kind of surety is to provide the credibility of contractors to their clients. That is, if a contractor is bonded, a client will know that the contractor is making assurances that all work is guaranteed to meet satisfaction. Many individuals and agencies specifically seek out bonded contractors for this reason. Within this context, bonding is not only a protection for the parties involved but also a way to strengthen the credibility of a contractor.

Several factors contribute to the cost of this bond type. Factors that impact the bond premium include:

• The scope of work to be completed
• The terms of the contract between a client and contractor
• The amount of coverage needed for the bond, based on the scope of a project and contract
• The amount of time of coverage needed for the bond, based on the scope and contract
• Work record of the builders
• The amount of time the builders have been in business
• The personal credit score of the builders
• The personal and business financial records of the general contractor
• Any fees or taxes as required by the guarantor or state and federal regulations

These factors determine the premium rate of the bond, which can be somewhere between one and four percent of the total bond amount. Therefore, in a bond of $100,000, the premium would be between $1,000 and $4,000. The contractor's credit score has a significant impact on determining the premium. For this reason, contractors with poor credit are not likely to be approved for the bonds. The minimum credit score depends on the guarantor company's requirements.

Because of the variety of factors used to determine the exact parameter of bonds, it is impossible to estimate a cost without examining these factors. The better the financial records and credit score of the involved contractor, the better the rates that will be available.