In many states, the use of subdivision bonds is increasing. If you’re a contractor, property owner, or developer you should learn the basics of these bonds to ensure you know what they mean for your businesses development projects.
Subdivision bonds are a guarantee that contractors meet their performance obligations.
A subdivision bond is a contract performance bond that can also be known as a developer bond, land improvement bond, site improvement bond, plat bond, completion bond, or performance bond. Subdivision bonds provide a guarantee that improvements will be made to land within a subdivision.
Why are subdivision bonds important?
Subdivision bonds are required by some local governments when contractors start work on a subdivision building project. They are a guarantee that the contractor will complete improvement works such as sidewalk maintenance, electrical upgrades, grading changes, etc. in the required time frame. In other words, subdivision bonds are a form of insurance that ensures the government agency will receive the necessary money to get the work done if the contractor fails to complete the project in a timely fashion.
Subdivision bonds are an important part of the construction industry because they help keep even large, complex projects on budget. Developers use subdivision bonds to ensure that they keep their promises and complete all promised improvements in a development. It’s easy to go over budget or miss deadlines on a big build, and in that process, developments sometimes run out of money before every promised part of the work can be finished. This sort of unfinished work can reduce the value of the entire project.
In fact, planned communities are so named because they are based on large, complex plans. Everything needed for the subdivision from services and roads to plumbing and fixtures contributes to that subdivision’s value. Subdivision bonds help guarantee that these development properties are worth as much as they ought to be.
Subdivision bonds involve three key parties: the principle, the obligee, and the surety.
The principle is the contractor or business owner who purchases the subdivision bond. The obligee is the government agency that requires the purchase of the bond. The surety is the underwriter of the subdivision bond.
As a contractor, landowner, or developer, when you purchase a subdivision bond the surety agrees to pay the cost of the land improvements to the obligee, should you fail to complete the required improvement work. The surety can then pursue reimbursement from the bond principal (you the contractor).
The difference between subdivision bonds and other surety bonds
Sometimes, subdivision bonds are confused with site improvement bonds. The biggest difference between subdivision bonds and site improvement bonds is that subdivision bonds are posted for residential building projects. On the other hand, contractors and business owners post site improvement bonds for non-residential work such as churches, hospitals, and strip malls. However, although these bonds are different, they share many similarities and use similar application and underwriting criteria.
The most important distinction between subdivision bonds and other contract performance bonds is that the principal—the owner or developer—must pay for building the improvements covered by the bond rather than the obligee—the public agency. This matters especially in cases where contractors agree to post or otherwise secure subdivision bonds for developers or owners. That is because in other cases, a contractor who doesn’t get paid can stop working as a contractual right. However, even if the developer or owner doesn’t pay the contractor, if they post the subdivision bond, they have no choice but to finish the work. That is why posting the bond for an owner can be a risky practice.
The cost and convenience of subdivision bonds
Generally, a subdivision bond will cost around 3% of the bond amount, but there are several factors that will impact the price. Unsurprisingly, the contract terms and size will be an important consideration for the bond company. What many people don’t realize is that the contractor’s history is also considered an important factor for the bond pricing. In particular, the bond company may examine the contractor’s work history and credit score to use as indicators of their trustworthiness.
Acquiring a subdivision bond can be a complicated process that requires credit checks, financial statements, application forms, project outlines, and funding information. Viking Bond Service, Inc. are experts at helping contractors and developers secure subdivision bonds. We’re here to make the process as simple and convenient as possible. Contact us today for a subdivision bond quote.