What are Maintenance Bonds and Their Benefits to Clients?

There are many types of surety bonds available for purchase. Each will apply to different liabilities that various businesses, notably contractors, might have to guarantee before their clients will engage in businesses with them. Most of the time, contractors will need a variety of surety bonds. Each will apply to different aspects of their promises to clients. 

One of these is a maintenance bond. It will apply specifically to guarantees after the contractor completes its work. It is necessary to have because a contractor might never know when a problem will occur, even though they think they have done their job correctly. If you find out that you need one of these bonds, you can often add it easily into your commercial bond portfolio.

Below, we’ll take a look at the surety bond industry and discuss some of the specifics of maintenance bonds. 

What is a surety bond?  

Some people think that surety bonds are the same as insurance. On one hand, they do serve as financial protection. However, they generally are meant more for the benefit of clients than for the contractors themselves. The appropriate surety bond will inform a client that the business has the financial credit and ability to complete their work. If they fail to do so, the contractor will provide adequate compensation for the client.   

Unlike insurance, a bond does not remove a contractor from a financial responsibility to a client. It just guarantees that a bond carrier will compensate the client if they make a mistake. There are three parties involved in surety bond agreements: 

• Principals are the parties that carry the bonds, in this case the contractor. 
• Obligees are those who require a business to carry a bond. They might be a government entity or a client. Local regulations also often require certain businesses to buy bonds.  
• Sureties are the financial institutions that issue bonds on the principal’s behalf.  

Should a principal renege on their duties to their obligees, the obligee has a right to file against the bond. They file the claim through the surety company. The surety will provide them with repayment in line with the bond’s terms. However, the surety company will then require the principal to pay them back for the amount they dispensed.  

Again, due to the many liabilities that contractors assume, they often have to carry several bonds. A maintenance bond will apply to bond-related claims that arise after a contractor completes their work.  

What are Maintenance Bonds?  

In a way, a maintenance bond functions like a variation of a product warranty. Once you complete a job, there is a chance that the project might fail to work properly. This might happen even if you did everything you could to prevent it. Some of the issues that arise might include problems with your workmanship, design defects and other issues. The issue is that they might impact the client, too. 

A maintenance bond will stipulate that you guarantee a client compensation for these issues. They might promise that you will either reimburse the client for the damage or that you will repair it. The bond furthers your promise to do everything you can to meet client expectations.  

This obligation will not exist forever, though. Most maintenance bonds will last for a period of several month or years. After the bond terms expire, you will no longer have to guarantee assistance to the client.  

A Maintenance Bond Claim Scenario  

Suppose that your contracting firm agrees to build a medical complex. Before the client will finalize the contract, they will require you to get a maintenance bond. You will approach a surety company to issue the bond. It will take effect after you complete the construction.  

A few months after the construction, you receive a call from the client. They tell you that there are cracks in the foundation around the building. They have compromised this building’s structural integrity and will require repairs. The client reminds you of the terms of your maintenance bond and request to file a claim.  

The surety company can review the claim and determine if the bond covers the issue in question. If it does, the bond will stipulate how you must compensate the client. This might include repairing the issue or providing payment for the client. After you provide the assistance to the client, the surety can then close the claim. If the surety pays on your behalf, then you will have to reimburse the surety. 

The Difference of Maintenance and Performance Bonds

Another type of surety bond is a performance bond, and it is very similar to a maintenance bond. However, the performance bond applies during the course of construction. It promises that if you do not do the work as you said you would in the contract, then you will compensate the client. Though there might be some overlaps in these bonds, usually maintenance bonds come into effect after performance bonds end. One bond will not replace the other, however. 

 Depending on your construction services, your need for a maintenance bond might vary. Always confirm with a prospective client whether they require this investment at the time that you enter contract negotiations.