Maintenance Bonds can be troublesome, even though you could say the risk on them is relatively low. So what’s the deal on these?
A Maintenance Bond normally follows a Performance and Payment (P&P) Bond that guarantees a construction contract. In many cases the Performance Bond may also cover defective materials and workmanship for some time period after acceptance of the work. This is referred to as a maintenance period, and the bond that may specifically cover it carries the same name.
There are times when the obligee (party protected by the bond) wants two years of maintenance. If that is longer than the performance bond provides, a separate maintenance bond is needed. There are also cases in which no maintenance period is automatically provided by the P&P bond, so there must be a maintenance bond if the protection is desired.
Why is the Risk Relatively Low on a Maintenance Bond?
Assume “Surety A” provided a P&P bond on a contract. They already faced the risk of the project not being performed properly. Having now passed that exposure, it is a small step to guarantee the materials and workmanship that went into the project. For this reason, a Maintenance Bond following a P&P Bond issued by the same surety, may be much less expensive than the related P&P Bond, and would be freely given.
Sometimes They Play Hard to Get
There are a couple of factors that can make these bonds difficult to obtain.
- No P&P Bond – If no P&P bond was issued, the underwriter will be justifiably suspicious if a maintenance bond is requested. Perhaps the obligee regrets not having obtained a P&P bond or was unwilling to spend the money for one. Now they want a cheap alternative that can still cover the entire project. Maybe they observed a suspected defect in the work and belatedly want the protection of a surety bond.
- Different sureties – If Surety A wrote the P&P bond, Surety B will obviously ask why “A” is not also handling the maintenance bond. Maybe “A” knows there was a problem on the contract and they want to run away from it while they can. The only good candidate for the maintenance bond is the surety that got paid on the P&P bond.
- Low percentage maintenance obligation – often the maintenance bond is issued for less than 100% of the contract amount. It may be for 20%. You have a low dollar amount, but it still covers the entire project. This is an unappealing situation for the surety. But it is one they will tolerate If they already reaped the benefit of issuing the P&P bond.
- Low rates – Maintenance bond rates are normally lower than P&P bond rates because… (*why do you think?) This makes them less rewarding for the surety.
- Difficult guarantees – Some maintenance bonds cover efficient or successful operations instead of the normal “defective materials and workmanship.” This is a far more difficult guarantee for the surety to provide. Many are unwilling to provide such bonds.
The only alternative to a bond may be a “cash” type alternative such as a Standby Irrevocable Letter of Credit issued by a commercial bank. The client may not think this is a great solution, and there will be no commission for the agent, but there are not many options at this point.
One consolation is that maintenance bonds are often written for a small percentage of the contract amount. So cash in lieu of bonds may be feasible.
Maintenance bond rates may be lower than P&P bonds because the work is already in place and has been accepted by the architect and / or owner.
A special note from the author: Steve Golia
I am an Independent Broker and Surety Bond Specialist. If you wish to co-broker bond business, together we will deliver the best in bonding expertise for your clients. I have a broad range of markets available and often can solve problems even when others have failed.
Call me now (856-304-7348) or email: Steven.Golia@gmail.com