MAINTENANCE BONDS FOR TEXAS CONTRACTORS

COUNT ON STOKES SURETY BONDS

contractor holding his bid documents for tender date

Brief

When most people think about bonds, they don’t tend to think of something before a project. It makes sense to invest in a bond before you complete a project when bidding on a project, or during a project. It doesn’t make much sense to invest in a bond after a project is over, right?

Well, that’s exactly what a maintenance bond is. A maintenance bond is a type of a construction surety bond that is purchased after a project is over. It protects the owner of the project for a specific amount of time. If something goes wrong within this time period that the contractor cannot cover, the maintenance bond will step in and offer its protection.

If there are defects in materials, defaults in workmanship, or if it turns out the project wasn’t done right in the first place, this bond will step in and offer the coverage that is needed to rectify the situation.

As you can likely see, everything about the maintenance bond is different. Maintenance bonds are entirely different from traditional bonds. Therefore, it only makes sense that the pricing of maintenance bonds would be different as well.

THE INNER WORKING OF A MAINTENANCE BONDS

Despite what was said above, when it comes right down to it, the maintenance bond does work in a similar way that other surety bonds work. It is a contract or agreement between three parties. This would be the obligee, the principal, and the surety bond. A contract or third-party will guarantee contractual obligations of the principal to the obligee by agreeing to compensate when and where needed. That’s the technical way to put it.

In its most simple terms, a maintenance bond will cover one party financially if something goes wrong after a project is over. If the parties that completed the project cannot afford problems after the contract is completed, the maintenance bond will step in and offer the financial support that is needed to correct the problem. 

Under the terms of the maintenance bond, it will be the principal or the contractor that purchases the bond. This is also the individual or company that is performing the work. The obligee or the owner of the project is the one that is protected under the maintenance bond. This will be the party that receives compensation if something goes wrong after the project is completed.

While you can likely see the importance of a maintenance bond, they are not usually required for private construction jobs. These types of bonds are usually only issued for federal, government, and commercial projects. When it comes to private, residential jobs, it is up to the principal to decide whether or not they want to implement requirements for these types of bonds. 

This is not the case when it comes to commercial, government, and federal jobs. When a United States contractor takes on one of these jobs, he or she will likely be required by local state law to purchase and comply with these types of bonds.  

WHAT IS REQUIRED FOR A MAINTENANCE BOND?

It is important to remember that a maintenance bond only offers protection for so long. Once the terms of the agreement are up, if something goes wrong there will not be any financial compensation. Even if there are material defects the day after the bond expires, the company will not be contractually liable for the financial charges.

However, after the completion of a project, if a building is found not to be designed to the specified agreed on terms, the obligee or owner of the project can request compensation to have the changes made. In order for this to happen the owner of the project would have to file what is known as a claim. This is filed to the surety company. If the surety company finds that the claim is legit, they will pay to have the changes made or to rectify whatever the current issue is. In turn, the contractor or the principal (contractor) will have to recompensate the surety company.

Regardless of the situation, you can see how the surety company is at the mercy of the contractor. It really comes down to the quality of the contractor and their actions on a job. This is why a surety company like Stokes Surety Bonds has specific requirements before agreeing to cover such bonds. Insurance companies will make sure principals meet specific standards and requirements before issuing a bond.

 These requirements will vary from provider to provider, but most of them are going to at least require a background and credit check. They’ll check out the background and credit history of the company applying for the bond just to make sure that they can financially cover the bond if something does go wrong. This will protect the surety company against an event in which the principal or contractor cannot financially afford to cover a claim. 

When you look at it, a maintenance bond works similar to that of insurance. While they are nowhere near the same thing, they do work in a similar manner. They basically function as insurance, offering financial compensation if the contractor leaves defects in the job or doesn’t complete the job as agreed upon.  

SELECTING A MAINTENANCE BOND PROVIDER

Just like the surety company has the option of bonding a principal, the principal also has the option of choosing which insurance provider he or she goes with. This doesn’t necessarily mean that every company out there will be approved by every insurance company, but principals do have the option of picking a provider. This is important because it can help the contractor or principal save money on their bond.

Certain insurance providers might charge more for specific bonds. They may charge more based on your previous claims, the type of project that you are undertaking, or the length of maintenance coverage. 

Some might even charge more depending on the type of business that you are in. The bigger a project is and the more it costs, the higher coverage will be. And, this is just simply because it makes it riskier for the insurance provider to insure you.

Whatever the situation, shopping around for providers can help principals save money. Not only can it help them save money, but it can help them ensure that they are getting the best protection possible. 

Some surety and insurance companies that issue maintenance bonds are more familiar with different types of businesses than others. An insurance company that better understands a company and its specific risks can offer tailor-made protection with their coverage policies. It might not seem like it, but a maintenance bond can be beneficial for both the obligee and principal. 

NEED A CONSTRUCTION SURETY BOND FOR A JOB? COUNT ON STOKES SURETY BONDS