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

Warranty Bond

What Is A Warranty Bond?

A warranty bond is used in the construction industry, and is a bond that guarantees that a contractor or construction company will complete a project to satisfaction, adhering to building codes and standards and taking care of any warranty issues within the span of a project. If defects in the quality of construction are noticed, the contractor is obligated to remedy those defects. If he/she fails to do so, a claim is filed against his bond and he has to pay damages. This bond is a legally binding contract between three parties; the principal which is the contractor, the obligee which is the client, and the Surety which is an insurance company, a bond company or other financial institution.

How Do Warranty Bonds Work?

A home owner may want some additional work done on his house so he calls a contractor to do this. The course of doing additional work could pose a financial risk to the already built structure if the job done by the contractor is subpar, and the result could be huge financial losses to the home owner. To mitigate the occurrence of this and protect against such incidences, the client i.e. home owner will require the contractor to obtain a warranty bond before carrying out construction. Warranty bonds are not limited to home owners and houses, they are also gotten for corporate structures, renovations and additional constructions.

There is no way to fully guarantee that the job done by a contractor will be 100% satisfactory, however, this warranty bond guarantees that the client will be financially remunerated if the additions or modifications made by the contractor turn out to be deficient.

If the work done by the contractors turn out to be deficient or is unable to be completed within an agreed upon time, the client can file a claim against the bond, and if the contractor cannot afford to pay the bond, the Surety steps in to pay on behalf of the contractor. The contractor is legally obligated to reimburse the Surety.

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