When two parties have a contract, such as between a contractor and a client, the parameters of the contract provide assurances that the work will be completed and meet the expectations of the client. However, if that does not happen, clients have few options other than seeking legal recourse and may still be stuck with paying additional money to fix problems that arose after the project was completed.
It is for this reason that many contractors advertise that they are bonded. Bonding is a way that contractors provide a guarantee that the work completed will meet expectations or the client will receive compensation. In construction, this is referred to as a maintenance bond. Understanding this type of bond will help prepare contractors for the use of this type of bond to do business with clients more successfully. They are also referred to as a warranty bond.
What is a Maintenance Bond?
A maintenance bond is a type of surety bond purchased by a contractor as a 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 obligee. 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.
What is the purpose of a warranty bond?
The purpose of this type of construction bond is as protection for the client in construction work. Not only do bonds ensure that the physical work itself is completed, but it ensures 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 a 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 for 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 a 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 a way to strengthen the credibility of a contractor.
What is the associated cost?
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 regulation
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.
How do I apply for a maintenance bond?
The specific application process depends largely on the guarantor company the contractor works with. However, the application process is typically quick and easy for contractors. Many applications can be completed online. Once all the financial information has been compiled in the application, the guarantor company will examine the application to approve or deny the application. The length of time needed to process the application depends on the complexity of the request and the financial information provided by the involved contractor.
Maintenance and warranty bonds ensure that all work completed by a general contractor meets expectations and increase the credibility of the contractor to a client. Whether the construction project is large or small, this bond type will bridge the gap between the parameters of the contract and the assurances by the contractor that their work will be completed satisfactorily. In this way, the involved contractor will have a foundation to build trust with their client from the start of the job.
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