7 Must-Know Differences Between Maintenance Bonds and Performance Bonds

If you are about to start a real estate project, you need to read this article. As a real estate owner, you want your project to be completed on time without too much stress. Once your project is finished, you get a perfect-looking place with everything in its ideal state, and as it’s a new work, you expect that the work will last for a long time. That’s where you need maintenance bonds and performance bonds. 

Maintenance Bonds ensure that the contractor covers the cost for any repair that comes after the project is done. While performance bonds guarantee that the contractor finishes their job as promised. 

So, should you opt for both bonds for your project? Or just one of them? It depends on what you prefer. But don’t worry; this post is your guide that will help you understand the difference between both bonds and have a clear picture of what would benefit you. 

Understanding Maintenance Bonds

A maintenance bond is like a promise from the contractor that says, “If anything happens after we complete the project, any extra repair cost, material, or design fault, we will fix it for no extra cost.” 

Maintenance bonds are a type of insurance that ensures that if any problems arise after the contractor has completed the project, the bond will pay for the repair. The contractor will redo the necessary work. 

A maintenance bond is to be purchased by the contractor for the project. It usually costs around 2-3% for the project and has a duration of a few years in which the owner can file a claim against it. 

READ MORE Maintenance Bonds: What They Are and How They Work

Understanding Performance Bonds

A performance bond is your guarantee that your hired contractor does their job as per the agreed-upon terms. These include the quality of work, the material to be used, and the envisioned design. 

So, how does it work? If your contractor doesn’t perform the job as per your agreed-upon terms or is taking too long to complete the project, a performance bond ensures that you can afford to hire a different contractor who will redo the job as per your wish. A performance bond costs around 0.5% – 4% of the contract price. 

Key Differences Between Maintenance Bonds and Performance Bonds

Now that we have the basics out of the way, let’s look at the key differences between both bonds. 

1. Purpose and Timing

The most crucial difference between a maintenance bond and a performance bond is when they kick in and why they are used. 

Maintenance bonds are used to ensure post-construction property repairs, which means if they are applicable after the contractor has completed their project, then some problem arose in the property. 

On the other hand, performance bonds are more concerned with the human aspect of the project. It ensures that the contractor completes their work as per the agreement, including the quality, time, and designs. 

2. Coverage

So, what coverage do both bonds provide? 

Maintenance bonds are applicable after the project is finished. Maintenance bond comes into play if there is some issue with the property, like leakage, faulty work, weak walls, loose tiles, etc. The bond compensates for these extra repairs, which the contractor will do again. 

Performance bond kicks in as soon as the project begins. It has a much larger scope than a maintenance bond. It covers the entire project, including intangible components such as time. The bond can be used if the contractor fails to complete the project in time, gives a poor quality product, has a wrong or poor design building, etc. 

3. Financial Protection

The maintenance bond protects the owner from the extra cost they have to pay in case the property has some issues after the construction. It ensures that the owner can use the bond and claim the reimbursement amount that the contractor will use to renovate the bad products. 

In case of a performance bond, it covers the entire project’s funding. It protects the owner during the construction phase. Whether the work is poor or the contractor cannot complete it on time, performance bonds ensure that the owner has enough finances to hire another contractor needed to complete the project. 

4. Time Frame

A maintenance bond has a limited time frame under which it can be claimed. It usually comes with a duration of 1-5 years after the construction is completed. 

A performance bond can only be claimed until the construction is completed and is as per the agreed-upon terms. Once the project is finished, the bond cannot be used. 

5. Comparing Costs 

Maintenance bonds have a much narrower scope of coverage, which means they can only be used for specific repairs and replacements; they have a much lower cost compared to performance bonds. 

In contrast, performance bonds cover the compensation for the entire project; this makes the bond more expensive, given the higher risk. 

READ MORE What Are Property Bonds and How Do They Work?

FAQs

Final Statement

Performance bonds and the maintenance bond, serve different yet equally significant functions. Performance bonds ensure that the construction project is finished in accordance with the terms agreed upon and provide protection during the construction phase. A maintenance bond comes in when the construction is completed, protecting against any issues or problems that could arise later on in the future.

If you include both maintenance and performance bonds into the project plan, it will not only help reduce risks but also serve as a security line that could save time, money, and stress in the long run.