What is a Site Improvement Bond?
A Site Improvement Bond is a type of an “on-site” surety bond that renovation developers will purchase to cover the work they are doing to complete improvement projects on existing public property structures in compliance to applicable building codes.
It is a guarantee to the property owner that the work outlined in the contract will be completed as agreed upon or else they will be reimbursed by the Surety company that issued the bond.
The owner can then use that money to hire someone else to complete the project without having to take any more money out of pocket.
Is a Site Improvement Bond the same as a Subdivision Bond?
A site improvement bond is purchased only for projects done on preexisting structures, such as a home or commercial building that is being renovated. A subdivision bond is for projects where new structures are being built. The site improvement bond is also known as a subdivision improvement bond.
How does the Site Improvement Bond work?
To obtain approval for performing site improvements, the local government requires a Site Improvement Surety Bond to guarantee completion of a site improvement project.
The developer (Principal) must design improvements in compliance with state standards and specifications, and these will not be approved unless authorized by a local engineer. Some jurisdictions allow modifications from necessary improvements when the requirements will lead to excessive difficulties to the developer, and the change will not threaten public interests.
The project developer will purchase the bond from an underwriting company, or Surety, who is guaranteeing the work the developer is set to do. This bond will protect the Obligee (Project Owner or Government Agency) from any damages that occur as a result of the developer not completing the work as agreed or if there is any fraud or illegal activity involving the developer on the project. If any of these things occur, the Obligee can then file a claim against the bond.
The Surety will determine if the claim is valid. If it is, then a payment, up to the amount of the bond, will be given to the Obligee. The Principal will be responsible for reimbursing the surety company for the amount paid out for the claim.
Why do I need to enter a Subdivision Agreement to obtain a Site Improvement Bond?
The Obligee (Project Owner or Government Agency) will require site developers to sign a Subdivision Agreement that details the types of improvements needed for a particular public works project.
Most site improvement requirements are geared for on-site improvements, those within the boundaries of a specific site or subdivision.
The types of site improvements in a Subdivision Agreement may include any or all of the following public improvements of open spaces:
- Streets and pavements
- Water mains
- Drainage facilities
- Erosion and sediment controls
What are the requirements to qualify for a Site Improvement Bond?
While each bond is unique, surety underwriters may ask for the following documents.
- Completed application form (which includes a Surety Subdivision Improvement Questionnaire)
- Copy of Subdivision Agreement (usually drafted by Obligee)
- Completed Subdivision Bond form (usually drafted by the Oligee).
- Business entity documents may be requested: Articles of Incorporation, Joint Venture Agreement, Partnership Agreement
- Both personal and business financial statements (balance sheets, income, bank statements, copy of loan documents, etc.)
- An irrevocable letter of credit (if collateral is required)
- Prior work references (include job description and contact details)
- Engineer’s estimates may be requested
- Project appraisal/market analysis may be requested.
- Developer information (bid amount, performance or payment bond contracts if available)
Once you have all the proper documentation and financial proof, a surety underwriter will quickly make decisions to issue a Site Improvement Bond for your project.
As a developer, you carry the full responsibility of financing the costs necessary to complete the improvements. If a project is to be funded through a bank (Set Aside Bank), the Surety will request and get a Set Aside Agreement from the Set Aside Bank. This Agreement details the commitment to fund the entire project where the Set Aside Bank has sufficient funds exclusive for the use of completing the site improvements.
How much does a Site Improvement Bond cost?
The amount you will pay for a Site Improvement Bond will be different for each project.
A site improvement bond can be split into two categories: Performance and Payment.
A Site Improvement Performance Bond guarantees faithful performance in completing the contract. The amount is a percentage of the total estimated cost of the site improvements to be installed.
A Site Improvement Payment Bond secures payment to subcontractors, laborers, and material suppliers. The amount is a percentage (between 50% and 100%) of the total estimated cost of the improvements.
Who can file a claim against a Site Improvement Bond?
The developer is not the actual builder of the site improvements and has a separate contract with a builder. Therefore, there is no relation of contract between the Surety and the builder.
If the developer does not fulfill its site improvement obligations, the Obligee’s claim is against the developer under the Subdivision Agreement and the Surety under the Site Improvement Bonds. Most often, the Surety deals directly with the developer as its Principal.
However, if the developer is not responsive, the Surety may also connect with the builder to resolve the claim and mitigate the damages.
The use of a surety bond to secure the completion and financial protection of required site improvements undoubtedly offers many advantages. One of our licensed surety agents will be able to get you a fast, free quote for a site improvement bond, as well as any additional bonds that you require for your upcoming projects. We will guide you through the process and make it as quick and easy as possible, so you get your bond paperwork when you need it.