What is the difference between a Maintenance Bond and a Performance Bond?
A Maintenance Surety Bond provides protection against defects on construction improvements already put in place. This work has been accepted by the owner as fully completed by required standards and specifications. And the Maintenance Bond will provide financial guarantee should any defects arise from materials or workmanship. From a risk standpoint:
- The primary concern of the work actually getting done has been alleviated. And the maintenance period could be interpreted as less risky since the work was inspected and accepted by the owner’s engineer.
- A Maintenance Bond carries less financial risk in that the dollar value of the bond is often only a fraction of the total cost of the work put in place (a 10% maintenance bond is common).
A Performance Bond, on the other hand, would come into play at the initiation of the construction phase. And guarantees all performance obligations outlined in the construction contract. The inherent risks in a Performance Bond are considerably higher than a Maintenance Bond due to the increased number of variables involved. Here are a few variables:
- Inaccurate estimating
- Changes in labor availability
- Weather delays
- Subcontractor risk
- Financial exposure typically 100% of the contract value
A couple of points to consider when we look at Maintenance Bonds and Performance Bonds. First, since a Performance Bond guarantees all obligations put in the contract, and most contracts specify a maintenance period, bond coverage for a standard 1-year maintenance period would be included in the scope and pricing of the Performance Bond.
Next, there are certain situations in which an owner contractually requires a maintenance period greater than 1 year. As noted above, if a Performance Bond is written a 1 year maintenance guarantee is included. When a maintenance period of 2 years or more is required the surety company will charge additional premium per year for the added exposure.
From an industry standpoint, maintenance periods up to 5 years are acceptable for a strong account. Supporting a maintenance period beyond 5 years can be challenging and can involve methods to mitigate risk. For example, many owners require longer term maintenance periods on roofing. Your surety underwriter may request information on the long term warranty provided by the material supplier. And investigate whether or not this manufacturer’s warranty “passes through” the contractor and runs directly to the owner thereby offsetting some of the risk. This is something you’d want to run by your legal counsel but arises often when underwriting long term warranties in construction.
Do you need a Maintenance Bond? We will need evidence of the value of the project and confirmation that the work has been accepted. The premium is generally less than a Payment & Performance Bond as the work has already been completed and accepted by the owner. Contact us and we’d be happy to help you obtain a Maintenance Bond. Or you may start the application process here. Email Eric Schmalz at eric@schmalzsurety.com or call at 512-640-6444.
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