Warranty bond

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Warranty bond
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Warranty bond is a type of construction contract bond, that is supposed to provide a degree of security to the customer[1] by holding the contractor responsible for all types of maintenance work during the specified warranty period without any additional costs. It is a long-term type of bond due to its duration that ranges from 3 to 10 years. Warranty bonds are required by US state Departments of Transportation (DOTs) on special projects with warranty provisions[2].

It is possible to use this bond as an exchange for the expiring performance bond or even combining these two[3]. Similar type to warranty bond, that is often volunteered by the exporter, is called retention bond[4].

History

Warranty provisions were introduced during the early 1990s in United States in order to protect public agencies and their investment in highway construction by holding the contractors accountable for maintenance. Since then the use of warranties has increased, especially for transportation projects – by the end of 2003 in US warranty bonds were incorporated into state DOTs’ construction programs. Thereafter, it was observed that warranties can be beneficial to the state DOTs by reducing life-cycle costs, improving project quality, and acceleration of project's time delivery. However, the use of warranty bonds has also brought some issues and risk related to, for instance[5]:

  • increased initial costs,
  • limited participation of smaller contractors in the bidding process,
  • scepticism from contractors and surety companies causing more contract disputes and litigation.

Controversy over warranty bonds in US

Since the US state DOTs are requiring warranty bonds additionally to conventional contract bonds in their construction projects, more and more concerns arise, especially on the side of surety companies who provide the guarantee of the contractor’s operational and financial viability during the obligation period. The issue starts with the warranty bonds being long-term obligations which is already raising several concerns from the standpoint of risk involved in issuing these. The main problem here is trying to predict the contractor's financial position in the future – the longer the duration of the warranty period is, the bigger difficulties sureties have, because regardless of the contractor's current financial strength, predicting its position in even "only" 3 years is highly uncertain. Furthermore, this situation is causing sureties to limit the availability of the warranty bonds to smaller contractors, weakening the competitiveness on the market[6].

Footnotes

  1. Alan E. Branch, 2006, p. 317
  2. Mehmet E. Bayraktar, Quingbin Cui, Makarand Hastak, Issam Minkarah, 2006, p. 333
  3. Alan E. Branch, 2006, p. 318
  4. Alan E. Branch, 2006, p. 319
  5. Deepak Sharma, Quingbin Cui, Ronald Baldwin, Don Arkle, 2019, p. 1
  6. Mehmet E. Bayraktar, Quingbin Cui, Makarand Hastak, Issam Minkarah, 2006, p. 333

References

Author: Monika Ptasińska