When working in construction, odds are that you’re at least a little familiar with the concept of bonds. These bonds essentially serve the function of insurance. They work as guarantees that all terms as decided in contract are going to be followed to the letter. There are different types of bonds for different purposes. Some of the examples include a material and labour bond or a performance bond. The former guarantees payment for sub-contractors and suppliers meanwhile the other one is to ensure that contractual terms are followed as outlined. However there is also the site improvement bond.
What is a Site Improvement Bond?
While bonds mainly function as a guarantee of payment, though in this case the bond is entirely concerned with making improvements to pre-existing property. Conceptually, these bonds come off very similar to subdivision bonds, however the distinction here is that subdivision bonds are only applicable to new buildings as opposed to ones that already exist.
As far as site improvement bonds are concerned, you only do the specific job you’re hired for. A fairly simple example of this would be if you were hired to tear down a wall. For this job you would do specifically that and nothing less, nothing more. Additionally, it’s mandatory and absolutely required to purchase such a bond if any sort of construction is planned on pre-existing property. You can easily purchase these from a bonding insurance company.
In the case of these bonds, there are three primary parties involved. These parties are designated the roles of Principal, Obligee, and Surety. The part of Principal is played by the developer, whose responsibilities involve the design of the improvements. They are to make sure that these designs fall in line with the standards and specifications as outlined by local law. A local engineer is necessary here as the designs can only be approved after the engineer has authorised them. The Obligee is the project owner (or in some cases a government agency), while the Surety is the underwriting company.
The Surety is there to guarantee that the job is carried out as per the terms of the contract. And as for the Obligee, the bond works as a form of protection and compensation. This is in the case that the project is subject to damages such as in the event of a contractor being discovered to be involved in nefarious schemes that compromise the project. Such schemes would involve fraud or any other sort of illegal activity, the site improvement bond can also function as insurance in a monetary sense. This is done by giving the money to the owner of the building so as to reimburse them of any lost funds.
Note that site improvement bonds are also available in two varieties. There are site improvement performance bonds; which serve the purpose of making sure that the performance of the contractor or developer is in line with the terms of the contract. And then there are site improvement payment bonds; with this one functioning as a guarantee to the subcontractors, manual labour, and suppliers that they will be provided with their respective payments for the work they have contributed to the project.
Are they necessary?
For the most part, a site improvement bond is required by the local government. For these situations where you absolutely need one of these bonds, contractors are not allowed to begin working on the pre-existing property until and unless the bond has been posted. By having a site improvement bond on hand, the utilities and public property that will be developed are financed by it. For public sector related projects this ensures that the taxpayer’s money doesn’t go to waste, in the event of certain complications with the project. Examples of these complications would be, the developer’s performance falling short by failing to proceed in accordance with local construction and building codes or even, the developer defaulting amidst the project.
It’s not just the site improvement bond that’s necessary but also the Subdivision Agreement. This agreement is usually required by the Obligee and it needs to be signed by the site developers. This document is meant to outline and state the various developments that will be carried out as part of the project. In most cases these developments are required to be on-site. A Subdivision Agreement encompasses a wide variety of on-site improvements; examples of some of these would include (but are not limited to):
- Pavements, Roads, and Streets
- Erosion and Sediment Controls
- Drainage Facilities
How much do they cost?
There isn’t one consistent price applied across the board for these bonds. How much you pay for them as a contractor is calculated on the basis of multiple factors. Among the factors involved would be the size of the job; which is to say whether it’s a major one or not. Another one would be the previously agreed upon terms of the contract for the job. The finalised cost is subject to change based on other such relevant criteria as well.
Something very important to keep in mind in terms of the price is that you as a contractor need to be aware of the fact that your credit score (among various other financial credentials) can also make a difference to the amount that is eventually settled on. In fact also included as a contributing factor is how long you have owned your current business. Generally, it is advised that all contractors build their reputation to be reliable and professional, while also maintaining an immaculate credit score.
Additionally, since there are two types of site improvement bonds you will find that there is a difference in the amount charged between the two. For a site improvement performance bond it’s usually calculated by figuring out the total estimated cost of the improvements. The amount charged is a percentage of this total. In the case of site improvement payment bonds the total estimated cost of the improvements is again calculated. The cost is a percentage of this number; however it’s typically set at 50 per cent or 100 per cent.
Getting a Site Improvement Bond
First and foremost, you will need to do some research and find a trustworthy surety company. There are many resources available online so this shouldn’t be too much of a problem. After you have found one, the process will be fairly simple. All you need to do is fill out an application and submit it. You might have to wait a bit, but if your application receives approval you are expected to pay a fee, once this fee has been paid you will receive your bond in the mail. Note that based on protocol, you might also need other bonds, such as a bid bond or a performance bond, potentially a site security bond too.
When applying for a surety bond, the underwriter may request certain documents such as the following:
- A completed application form, within which a Surety Subdivision Improvement Questionnaire is included
- A copy of the Subdivision Agreement (though the Obligee typically drafts this)
- A completed Subdivision Bond Form (also typically drafted by the Obligee)
- Documents related to your business (i.e. Article of Incorporation, Partnership Agreement)
- Financial Statements, both business and personal (i.e. income, bank statements, balance sheets, etc.)
- If collateral is made a requirement an irrevocable letter of credit
- References from past work experience (i.e. job description and contact details)
- Developer information (i.e. bid amount, and if available payment or performance bond contracts)
Also worth mentioning is that the underwriter will be examining some specific areas before they approve your site improvement bond. The exact criteria includes: the financial strength and experience of the contractor/developer, which is followed by the scope of the project, then come the total estimated costs, and lastly the benefactor financing the project. These factors are analysed as site improvement bonds are underwritten very carefully and it’s important that the underwriter themselves has a clear idea of the guarantees relevant to the project. The site improvement bond can officially be processed for approval once the relevant documentation and financial proof has been provided.
An exact timeframe for approval doesn’t exist. Prior to any sort of approval for the bond, your construction company will have to go through a screening process and credit check. Due to certain security protocols put in place, such as granular underwriting, the process ends up fairly time consuming. This means that it can take a long period of time before the site improvement bond gets issued.