Glossary of Business Credit Terms

# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Maintenance Bond

What Is a Maintenance Bond?

A maintenance bond is a bond taken out by contractors that protect building owners from defects in workmanship, materials or design that could be detrimental to the project later in the future. This bond guarantees that the contractor will pay a certain amount in damages to the building owner if the work done turns out to be shabby or defective. Maintenance bonds are purchased for additional construction work on already finished buildings.

How Does a Maintenance Bond Work?

A maintenance bond is a contract between three parties, the Principal which is the contractor, the Obligee which is the building owner and the Surety which is the bond company. The Principal purchases the bond and the Surety finances it. The bond ensures that the construction work carried out by the contractor is adequate and up to standard. If the contractor should default and some part of the construction should be found to be defective, the building owner can file a claim, and the Surety pays for damages up to the bond value. The contractor is then legally obligated to reimburse the Surety.

Maintenance bonds are mostly required for state and public projects. Maintenance bonds remain active only for a period of time. Once the bond expires, any claims made by the Obligee will not be covered by the bond. Maintenance bonds usually provide cover for 12, 18 or 24 months.

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