A maintenance bond is a three-party guarantee where the Surety (Bond Company) provides a guarantee to the Obligee (Owner or Upstream Contractor) that the Principal (Contractor Providing the Bond) will warranty the project from defect for a specific period of time and make repairs if needed. Some contracts and Owners also refer to these as “Warranty Bonds”.
Who Needs a Maintenance Bond?
Maintenance bonds are required on most public work and many private jobs. Typically, when a performance bond is issued, 12-24 months of maintenance can be included by the surety bond company at no extra charge. Stand alone maintenance bonds are also very common, even when a performance bond is not required.
Time Period Considerations
Surety bond companies do not typically like to provide long term warranties which is in essence what a maintenance bond is covering. Construction changes quickly and a lot can happen over multiple years. Therefore, most surety bond companies will freely write maintenance bonds of 36 months or less with few issues. Certain surety bonds companies are also willing to go up to as much as 60 months depending on the type of work and the Obligee. For example, the Iowa DOT requires 5 years of maintenance to be included. Anything over 60 months it typically very difficult to get and should be covered other ways such as through an insurance policy. Regular wear and tear will affect even the best projects and you do not want to be coming back for decades doing free repairs.
What Should Not Be Included in a Maintenance Bond?
Routinely, we see contracts that require very long-term warranties on material. Primarily we see this in three trades including roofing, energy and turf for athletic fields. Surety bonds companies will not provide a maintenance bond to cover these long-term warranties. However, usually the manufacturer of these products will. Contractors and suppliers need to make sure that the contract passes the long-term obligation back to the manufacturer. A common example would be a roofing contract that requires a 20-year warranty. The contractor provides 24 months of maintenance on the labor and passes the remaining material warranty back to the manufacturer. There are also insurance companies that will provide long-term warranties for a premium. These are separate from the maintenance bond though.
How Much Does a Maintenance Bond Cost?
Maintenance bonds are very inexpensive, but each surety bond company has their own unique rate filings. As mentioned above, if a performance bond is issued on a project, most surety bond companies will include 12 months of maintenance at no additional cost. If more than 12 months maintenance is required, there is typically a charge that is 0.3% or less. If a performance bond was not required and only a maintenance bond is needed, the Surety and Fidelity Association of America’s rate manual says to charge, “75% of Miscellaneous Contract Rates.” That means about 1% on small contracts and even less on larger ones. The maintenance bond rate will ultimately depend on the financial strength of the Principal, along with the length and nature of the obligation. Expect to pay more if the Principal has credit challenges or is not strong financially. You can read all about how contract surety bonds are rated and ways to improve those rates here.
How Do I Get a Maintenance Bond?
MG Surety Bonds can help you through the process. For maintenance bonds less than $500,000 and 24 months in length, we can typically write the bond with a simple application. Larger or long-term obligations will require us to gather additional information including:
• A copy of the contract
• Financial statements on the company
• A personal financial statement on any owner owning more than 15% of the stock
• A completed application
We work with both national and regional surety bond companies and have the expertise to get you an approval.
What If I Have Bad Credit?
At some point, many great companies and owners have had setbacks. Not to worry. MG Surety Bond works with all major surety bond companies as well as specialty surety bond companies. Credit is an important piece of the underwriting process but not the only piece. We will work with you and the company to find a solution everyone is comfortable with. In rare circumstances, we have other tools that can help contractors with credit challenges including access to the SBA Bond Guarantee Program, Funds Control and Collateral Programs. There is rarely a situation when we can’t provide a solution. Unlike some internet companies, we are surety bond experts first. It is one of the reasons we have been so successful. Contractors often call us after they have been turned down by another surety bond broker.
Maintenance Bond Claims
Maintenance bond claims are very rare. The reason being is that the contractor usually just goes and corrects defect work should it arise, and the surety bond company does not need to get involved. If a maintenance bond claim is sent to the surety bond company, they will contact the contractor (The Principal on the Bond) and ask them to correct the work. Should the contractor dispute the claim or refuse, the surety bond company will investigate. If the claim is found to be valid, the surety bond company will have options to either correct the work, pay to have the work corrected, or write a check. They will then seek reimbursement from the Contractor and/or indemnitors on the maintenance bond.
What to Look for in a Maintenance Bond Company
The contract documents will outline the requirements for the surety bond company writing your maintenance bond. Many will require that your surety bond company be rated “A-“ or better by the rating agency A.M. Best. You can check that here (registration required). Contractors should be very suspicious about using a maintenance bond with a lesser rating. Most contracts will also require your surety bond company to be listed on the U.S. Department of Treasury’s Circular 570 which you can check here. This is sometimes shorted as a “T-Listing”.
Surety bonds are written on the principal of indemnity. This means that if the surety bond company suffers a loss, they will seek reimbursement from the indemnitors. Before getting a maintenance bond, the company and often the owners will be asked to sign a General Indemnity Agreement. You should read this agreement carefully before signing it as it spells out the terms and conditions of all indemnitors. This is one major difference between surety bonds and insurance. Contractors can read more about indemnity here.
We are a company that supports our customers by providing them with the surety bonds they need to thrive. We are not just internet marketers or insurance agents. We are surety bond experts. Our team has over 100 years of combined experience and has access to all major bond companies.
Through creativity, experience and a commitment to the industry, we find a way to say YES and support our customers through bond placement, education and financial advice. MG Surety Bonds is affiliated with The Miller Group. The Miller Group is 60-year-old company that started with a focus on bonding contractors. Our people are dedicated to supporting our customers and giving back to the communities we serve. The Miller Group is committed to placing God, family and community first. We look forward to serving you.
Ben Williams is the President of MG Surety Bonds. He grew up working for a family owned business before eventually starting two of his own. He understands the risks and challenges that business owners face and the importance of surety credit in growing and maintaining a company’s revenue. Ben has held leadership positions, in surety, mergers and acquisitions and finance. He worked for one of the largest brokers in the country before joining The Miller Group and leading their surety practice. Ben holds a bachelor’s degree in Finance along with an Associate in Fidelity and Surety Bonding (AFSB). He also regularly speaks at construction industry associations on surety bonds and construction economics and has been published in multiple industry publications.
Ben leads a team of dedicated surety bond professionals who are the reason for the company’s great success. The team’s only role is to consult, support and serve our bond customers. We work large national accounts and accounts that need their first bond. We hope to have the opportunity to support you and your team. We want to be your surety partner for life!