What it means
Most construction and engineering contracts end with a defects period, often one or two years, during which the contractor must repair faulty workmanship or materials. A maintenance bond, sometimes called a warranty bond, gives the owner a financial backstop for that promise.
The surety stands behind the contractor, so the owner is not relying only on the contractor's willingness or ability to return. The bond is usually set as a percentage of the contract value, with 10% being a common figure.
The contractor pays a premium to the surety, typically a small percentage of the bond amount, and the cost is often built into the contract price. In many cases a performance bond (a guarantee that the contractor will finish the job) converts into a maintenance bond once the work is complete, so cover continues without a gap.
For the owner, the bond replaces the older practice of retention, where a slice of each payment is held back until the defects period ends. Retention ties up the contractor's cash, while a bond frees that cash for the contractor and still protects the owner.
This is one reason contractors often prefer to offer a bond instead of accepting retention. A maintenance bond does not pay for everything.
It covers defects that arise from the contractor's work and are reported within the bond period, and it is capped at the bond amount. Normal wear, owner misuse and design faults that the contractor did not create are usually outside the cover.
If a claim is made, the surety normally investigates first. It may require the contractor to fix the problem, pay a replacement contractor, or settle the claim in cash up to the bond limit.
The surety then looks to the contractor to repay it, which is why a claim can damage the contractor's future access to bonding.
In practice
Real-world examples.
Example
A property developer finishes a 40-unit apartment block and receives a maintenance bond equal to 10% of the build contract. Eleven months later a section of roof membrane fails, the builder does not respond, and the developer uses the bond to pay another roofer.
Example
A city council commissions a new road resurfacing project and requires the contractor to provide a 12-month maintenance bond. When surface cracking appears in month nine, the council notifies the surety and the contractor is told to repair it at its own cost.
Example
A solar installer sells a commercial rooftop system to a warehouse owner and supplies a two-year maintenance bond. The bond reassures the owner that faulty wiring or mounting problems will be fixed, even if the installer later runs into financial trouble.
Formula
Calculation
Bond amount = Contract value x Bond percentage
Annual premium = Bond amount x Premium rate
Suppose a contractor completes a $2,000,000 office fit-out and the contract requires a 10% maintenance bond for 24 months. The bond amount is $2,000,000 x 0.10 = $200,000. If the surety charges a premium of 1.5% of the bond amount, the premium is $200,000 x 0.015 = $3,000. A defect claim of $60,000 would be paid in full from the bond, leaving $200,000 - $60,000 = $140,000 of cover for the rest of the period.Case study
Seen in the real world.
Harbourline Builders is an illustrative, fictional construction firm that completed a $5,000,000 clinic for a healthcare group. The contract called for a 10% maintenance bond lasting 18 months, so Harbourline arranged a $500,000 bond through its surety and paid a modest premium.
In month ten, the clinic's flooring began lifting in two corridors because of poor adhesive preparation. Harbourline was slow to respond because its crews were committed to another site, so the client served notice on both the contractor and the surety.
The surety pressed Harbourline to act, and the repairs were completed within weeks at the contractor's expense. In this illustrative story the bond was never paid out, but it did its job: the threat of a claim, and the damage it would do to Harbourline's bonding capacity, got the problem fixed quickly.
Watch out
Common mistakes.
- Treating a maintenance bond as the same thing as a performance bond, when one covers defects after completion and the other covers failure to finish.
- Assuming the bond covers any problem that appears, including wear and tear or defects caused by the owner's own misuse.
- Letting the bond expire without inspecting the work, so a defect that was present all along is discovered just after cover has ended.
Questions
People also ask.
Who pays for a maintenance bond?
The contractor pays the premium, though the cost is usually priced into the contract, so the owner funds it indirectly.
How long does a maintenance bond last?
Commonly one to two years from practical completion, though the contract sets the exact period.
What happens if the contractor will not repair a defect?
The owner notifies the surety, which can require the contractor to act, hire a replacement or pay out up to the bond limit.
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