Warranty bond
| Warranty bond |
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| See also |
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].
Examples of Warranty bond
- Warranty bond for construction projects: When a contractor is awarded a construction project, the customer may require a warranty bond from the contractor. The purpose of the bond is to guarantee that the contractor will fulfill all the obligations stated in the contract. If the contractor fails to do so, the customer can make a claim against the bond and receive compensation.
- Warranty bond for service contracts: A warranty bond may be required when a service provider agrees to provide services to a customer. The bond guarantees that the service provider will fulfill the obligations stated in the contract. If the service provider fails to do so, the customer can make a claim against the bond and receive compensation.
- Warranty bond for product sales: A warranty bond may be required when a product is sold to a customer. The bond guarantees that the product will be of the quality specified in the contract. If the product does not meet the quality standard, the customer can make a claim against the bond and receive compensation.
Advantages of Warranty bond
A warranty bond is a type of construction contract bond that provides a degree of security to the customer. The main advantages of a warranty bond are:
- It acts as a form of protection against any contractor’s failure to deliver on their contractual obligations.
- The bond amount is determined by the customer and contractor, allowing the customer to customize the amount of protection they desire.
- The customer can receive compensation if the contractor fails to complete the project in accordance with the contract.
- It provides peace of mind to both the customer and contractor, as they know their interests are protected in the event of a dispute.
- The bond can also act as a deterrent, as the contractor will be less likely to breach the contract if they know they will be liable for any cost overruns.
Limitations of Warranty bond
A warranty bond is a type of construction contract bond that is supposed to provide a degree of security to the customer. However, there are some limitations associated with these bonds. These limitations include:
- The bond is only applicable for the duration of the contract and does not extend beyond that. This means that any damages or losses after the contract has expired will not be covered.
- The bond does not cover any defects or damages that occur due to the owner's negligence or lack of maintenance.
- The bond does not cover any changes to the contract that are not approved by the surety.
- The bond does not cover any damages due to natural disasters or acts of God.
- The bond does not cover any damages or losses due to the contractor's fraud or dishonesty.
- The bond's coverage is limited to the amount specified in the contract. Any losses beyond this amount will not be covered.
A warranty bond is a type of construction contract bond that provides a degree of security to the customer. Other approaches related to warranty bonds include:
- Performance bond: A performance bond is a type of construction contract bond that is used to ensure that the contractor completes their construction project in accordance with the terms of the contract.
- Payment bond: A payment bond is a type of construction contract bond that is used to ensure that the contractor pays all suppliers and subcontractors for their labor and materials.
- Cash bond: A cash bond is a type of construction contract bond that provides the customer with security in the form of a cash deposit.
- Maintenance bond: A maintenance bond is a type of construction contract bond that is used to ensure that the contractor performs maintenance and repairs during the warranty period.
In summary, a warranty bond is a type of construction contract bond that provides a degree of security to the customer. Other approaches related to warranty bonds include performance bonds, payment bonds, cash bonds, and maintenance bonds. All of these bonds are designed to provide security for the customer, and to ensure that the contractor complies with the terms of the contract.
Footnotes
- ↑ Alan E. Branch, 2006, p. 317
- ↑ Mehmet E. Bayraktar, Quingbin Cui, Makarand Hastak, Issam Minkarah, 2006, p. 333
- ↑ Alan E. Branch, 2006, p. 318
- ↑ Alan E. Branch, 2006, p. 319
- ↑ Deepak Sharma, Quingbin Cui, Ronald Baldwin, Don Arkle, 2019, p. 1
- ↑ Mehmet E. Bayraktar, Quingbin Cui, Makarand Hastak, Issam Minkarah, 2006, p. 333
References
- Arkle D., Baldwin R., Cui Q., Sharma D., (2019), Big or small, does warranty contracting provide equal opportunities to all?, p. 1-2
- Bayraktar M.E., Cui Q., Hastak M., Minkarah I., (2006), Warranty bonds from the perspective of surety companies, "Journal of Construction Engineering and Management" Vol. 132 Issue: 4, p. 333
- Branch A.E., (2006), Export practice and management, Cengage Learning EMEA, p. 317-319
Author: Monika Ptasińska
