Whether you are a developer, a home builder or owner of a contracting business, and you are looking to expand and work on municipality, state or even nationwide improvement projects, you will find that some projects require you to post a subdivision bond.
Subdivision bonds are an important part of obtaining a building permit so you need to be well-acquainted with them before you file your paperwork. And while they might seem complicated at first glance, they follow a straightforward logic and are not that hard to understand. Here is all you need to know about subdivision bonds, how much they cost and how to obtain one.
What are subdivision bonds?
Subdivision bonds are part of a broader category of bonds, called contract bonds. Contract bonds are types of surety bonds, usually required from contractors and construction companies when working on public projects. Like all surety bonds, contract bonds are a three-party agreement. In the case of subdivision bonds, these include the principal (builder or developer), the obligee (the municipality, county, state or other government institution) and the surety (the surety bonds company, underwriting the subdivision bond). Subdivision bonds are set in place to protect the obligee and insure that the principal will complete all improvements to a subdivision property as stated in the contract. You can most frequently expect to need a subdivision bond when working on street repairs, curbs, sidewalks, drainage systems, gutters and power lines, etc.
Important division of bonds
Public work projects often require other kinds of contract bonds as well, so it’s important to make a distinction between them. Performance and payment bonds are also required from contractors working on state or federal projects to make sure that they will adhere to the terms of the contract and that everyone working for them will receive their payment on time. Bid bonds are needed when contractors bid on public work projects. When placing a bid bond, a contractor promises that, in case he’s awarded the bid, he will provide a performance bond and execute the project at the bid price. Finally, site improvement bonds are the type of bonds most commonly mistaken for subdivision bonds. Whereas site improvement bonds are required for work done on existing buildings, subdivision bonds pertain only to the construction of new buildings.
How do you get a subdivision bond?
Subdivision bonds are typically required at the time a developer files their map (also known as plat) to the public agency. Luckily, once you obtain all the necessary paperwork, you can file everything online, using the website of a surety bonds agency. You will also be notified almost immediately whether you have been approved and how much you need to pay to get bonded. The price of your bond cannot be determined before you file all the paperwork, but you can get a rough estimate. You need to pay a percentage of the cost of the total amount of the bond. The percentage depends on a variety of factors – personal credit score, financial statements and years of experience, etc.
Financial issues and eventual risks
It doesn’t mean, however, that just because you have a new business, you will have a reduced chance of obtaining a subdivision bond. Much more important than your years of experience is whether you have secured financing or not. If the answer is no, you will have to prove that you can cover the expenses yourself. That’s understandable because all surety bonds assume a zero percent loss ratio. Thus, a surety will be less willing to underwrite a subdivision bond if there are some indications that something might stay in the way of the execution of the project. This is also the reason why people with bad credit will have a much harder time obtaining a subdivision bond. Still, if you have strong business statements or personal financials, you can still qualify. That’s why it’s important to work with a reputable surety bonds agency that has a rich network of partners.
Finally, you might wonder if you should provide a letter of credit in lieu of a subdivision bond. Subdivision bonds are the way to go for a number of reasons. To get a subdivision bond, you don’t need to come up with a large sum of money upfront as you only pay an annual premium that’s only a small percentage of the total cost. In addition to tying up a lot of money which you could be using for your business operations, the bank that holds your funds will continually charge you fees for the service. And, in the unfortunate event of a claim against you, a surety bonds company will provide you with a team of experts on claims who can help you dispute it.