What is a Subdivision Bond?
A subdivision bond is a type of an “off-site” surety bond that covers the various aspects of building a new subdivision, including streets, sewage, drainage ditches, gutters, and houses.
Having a subdivision bond is a type of insurance that guarantees to the project developer that the work inside the subdivision will be completed according to the provisions in the contract.
Although Subdivision Bonds are slightly similar to other Construction Bonds, the role and obligations of a developer are quite different from those of a contractor signing into a public works contract.
What makes Subdivision Bonds different from other Construction Bonds?
In subdivision development, it is the developer, not the Project Owner or Government Agency, who initiates land development. The developer will have to comply with state laws and enter into a Subdivision Agreement before being authorized by the Project Owner or Government Agency to commence construction. This authorization may be adapted to the construction of subdivision improvements as required by the local government. The developer, instead of a contractor, is the Principal on the Subdivision Bonds.
Also, there are distinctions when it comes to the scope of coverage between Subdivision Bonds and other Construction/Contract Bonds.
Both types of surety bonds include underlying contracts that agree to work on construction projects. However, other construction bonds (bid bonds, performance bonds, payment bonds, supply bonds) provide security for the performance and payment of all of the Principal’s contract job.
In contrast, Subdivision Bonds only guarantee the required public construction and improvements (which are often a small part of the overall development).
A developer is state-commissioned for the subdivision of land for residential development. The contractor will need to sign a Subdivision Agreement, which covers the completion of allocated subdivision improvements. The Subdivision Bonds ensure only the developer’s completion of the subdivision to be applied only to public homes and not to the construction of private dwellings (this is why it is called an off-site bond).
Is this the same as a Site Improvement Bond?
The subdivision bond and site improvement bonds are similar; however, the subdivision bond is for new construction whereas the site improvement bond is for existing structures.
Why do I need to have a Subdivision Bond?
Most local governments do require a land developer to obtain a subdivision bond before they begin work on the project. The paperwork for the bond would need to be included with the lot map or when requesting a building permit.
While Subdivision Bonds provide a guarantee to the Obligee if a developer defaults on its obligations under a Subdivision Agreement, there are differences in bond forms. A Subdivision Bond is also an indemnity bond which requires performance or payment up to the bond penalty from a surety if the contractor defaults on its duties under the Subdivision Agreement. In some states and cities, Subdivision Bonds are treated as either financial guarantees or forfeiture (penal) bonds.
Why do I have to get a Subdivision Agreement to post a Subdivision Bond?
Before construction of an undeveloped land, the Obligee (Project Owner or Government Agency) often requires a developer to enter into a Subdivision Agreement.
This Subdivision Agreement will require the developer to make improvements required by the Obligee as part of the state requirements and will arrange the duration within which the construction must be performed.
Furthermore, the Obligee may require that the developer guarantees the work claimed under the Subdivision Agreement for a year after completion and acceptance of the construction job, including liability for labor, defective work, and materials, by posting a Subdivision Bond.
What are the requirements to obtain a Subdivision Bond?
For you to qualify for a Subdivision Bond, a surety underwriter will need you to submit the following:
- Completed application form (including a Subdivision Improvement Questionnaire from the Surety)
- Subdivision Agreement (drafted by Obligee)
- Completed Subdivision Bond form
- A copy of business entity documents (may include, but not limited to):
Articles of Incorporation
Joint Venture Agreement
- Financial statements (both business and personal financial statements, including balance sheets, income, source of funds, bank statements, loan documents, etc.)
- Irrevocable letter of credit
- Prior project references (including job description and contact information)
- Engineer’s estimates with seal
- Letter of intent
- Appraisal/market analysis of the project
- Developer information (on performing the work, such as bid amount, copy of contract if available)
How much will I need to pay for a Subdivision Bond?
The amount you pay for a subdivision bond will depend on several factors, including the amount of the project, how much bond coverage is needed, a developer’s work record and financial credentials, contract terms and size, and credit score. You will only pay a small percentage of the total bond amount as a premium.
The cost for a Subdivision Performance Bond varies from a Subdivision Payment Bond.
The Subdivision Performance Bond, which ensures the faithful performance of the building and completion of structures, is calculated as a percentage of the total cost of the construction to be installed.
The Subdivision Payment Bond, which assures payment to the subcontractors, suppliers, and other labor personnel and persons providing equipment, is calculated in an amount not less than 50% and no more than a 100% of the total estimated costs of the construction and improvements.
Who can file a claim against the bond?
The developer will have no defense to a claim made on a Subdivision Bond if the timeframe for completion of subdivision improvements and construction has expired. Also, the Obligee can file a claim if it suffers losses because of the developer’s failure to complete a project according to the contract terms.
The options available to the Surety on a default against a Subdivision Bond are limited as opposed to the options available when a claim is filed on other Construction/Contract Bonds. The Surety will make a payment up to the full amount of the bond to the Obligee. If that happens, the developer will be responsible for paying that money back to the Surety.
Understanding the unique aspects of Subdivision Bonds should assist you in establishing a concrete plan to avoid claims. If you are unsure if you need to get a subdivision bond, contact one of our agents today and we will help get you the answer. If you do need the bond, we will get you a free quote and begin the process for you so that you can get your subdivision bond as soon as possible before you start on the project.