What it is:
A maintenance bond is a suretyfor construction projects.
How it works (Example):
For example, let's say Company XYZ is a contracting company hired to build the new ABC office building. It oversees all the construction workers, the permitting, and all the details associated with the construction. Once the project is complete, the contractor buys a maintenance bond for the new owner of the building (Company ABC). It purchases this bond from a third party, called a surety.
Three months after moving in, Company ABC discovers that the electrical work in the building is defective andcost $40,000 to fix. The bond company steps in and pays the expense.
Why it Matters:
Maintenance bonds are essentially insurance policies on workmanship. They ensure that the owner of a construction project is compensated for poor workmanship by the contractor. They also prevent the contractor from having to come up with the cash to reimburse clients. Maintenance bonds can have different time periods.