Professionals in the construction business are well aware that bonds are an important aspect of their projects. These bonds provide reassurance to owners and the construction workers that both parties will honour their side of the bargain. Due to the nature of the industry, there are various bonds available to serve different purposes. Among these different kinds of bonds you will come across the subdivision bond.
What is a Subdivision Bond?
For those who are less familiar with the topic, it would be best to go over the very basics to make sure the concept is fully understood. To that end, it’s beneficial to outline what exactly a subdivision bond is. Essentially, construction professionals apply for subdivision bonds when their company has bid on a job that involves building brand new structures. This is an important characteristic to note as it distinguishes subdivision bonds from site improvement bonds. The latter are only applicable when the job involves developing pre-existing buildings as opposed to constructing new ones.
Seeing as subdivision bonds function as a guarantee between the construction company and the owner of the project, it would be helpful to understand exactly what terms are applied. Among the more obvious terms is that the construction workers are expected to be punctual and finish their work on schedule without any delays. Aside from that, it’s the project owner’s way of assuring the workers that they carry the financial responsibility and will pay the necessary amount of money.
Also included within the terms is the assurance that the contractors will take responsibility for completing mandatory improvements to public infrastructure. For example developing, gutters, streets, sewers, sidewalks, drainage systems and streets. Make note of the fact that in some cases subdivision bonds become necessary as project owners want to provide assurance to local authorities that all regulations and standards will be abided by.
Are they the same as Site Improvement Bonds?
It has been observed that there’s a great deal of confusion surrounding subdivision and site improvement bonds. The common misconception is that both of them function in virtually the same manner and that these terms can be used interchangeably in discussion. However, as briefly mentioned above, the nature of both these bonds is completely different.
Site improvement bonds are exclusively meant for the purpose of “improving” structures that have already been built. This could include something as simple as tearing down a wall or even landscaping related work. At any rate, the primary mode of operation with these bonds is to develop what already exists. Comparatively subdivision bonds are exclusively tied to the construction of new facilities, infrastructure, etc. Such as building a new extension or working on drainage facilities.
With these facts in mind, it’s fair to conclude that site improvement bonds and subdivision bonds only have surface level similarities. When one carefully assesses the characteristics of both bonds, the differences immediately stand out, quickly erasing any confusion on the subject.
Are they mandatory?
Ultimately, every case and every project is different; so in a very general sense no, subdivision bonds are not always mandatory. However, at the same time it would be remiss to not acknowledge that some local governments and municipalities do not allow construction projects to begin until and unless a subdivision bond has been acquired. This is especially applicable in cases where the project involves public infrastructure (electrical line, streets, sidewalks, etc.), as the local government has to protect the interests of its citizens.
After your construction company has been able to acquire the bond as an official document, either the company itself or a developer absolutely must post the bond. This is necessary because until the bond has been posted by the relevant parties, you cannot be granted the legal building permit. And if you don’t have the permit you can’t begin working on the project.
Seeing as pursuing bonds is a legal process, there are some conditions that you are expected to meet. Obtaining any sort of bond requires you to present different sorts of information to the surety company so they can determine whether or not you can be trusted to follow the terms as outlined by the bond.
Myriad factors are taken into consideration when eligibility is being determined; among these is how long you have been active in the construction industry. Surety companies do give greater priority to construction companies with longer tenure because they have a track record that can easily be analysed to confirm whether or not they are capable of respecting the bond. Upstart companies tend to struggle a bit more. Even so, it isn’t impossible to get approval even as an upstart.
The determining process also takes into account the financial standing of your company. While the underwriter will decide which information is most relevant, usually you are expected to provide documentation like cash flow statements, the balance sheet, income statement, and the retained earnings statement. Once the necessary information has been examined, the underwriter can assess whether the company has the necessary leverage to pursue the bond.
Also very important is your personal credit score. While this might seem unrelated, it’s vital that the surety company is aware of your credit situation so they can determine exactly how much to charge you. This is because you aren’t expected to pay the entire amount settled on in the bond. Those with good credit will find that they are charged less; this is because they have proven themselves to be trustworthy based on the underwriter’s criteria. While those with bad credit will be confronted with higher premiums to prove they can also be trusted.
Applying for a Subdivision Bond
Considering the fact that the process requires you to present statements and details for multiple areas, it is generally advised to compile the information before the process is undertaken. For the sake of simplicity, the process for obtaining a subdivision bond can easily be broken down into a few important points.
- Filling out the relevant application
- Financial details for your company
- Providing relevant personal financial details (credit score, net worth statements)
- The work in progress report
- Account receivables
- In some cases a proposal form might be mandatory
The application is the first step of the process. Keep in mind that every bond has a different form, so make sure you are filling out the subdivision bond one. In the event that you’re confused or uncertain about anything please contact an underwriter to request assistance. Once the application has been completed you can submit it either online or through snail mail to the surety company, it’s really up to you.
The work in progress report (or schedule) is an official document used for the purpose of tracking the construction company’s progress on any given project. Your company is expected to fill out the paperwork for this report every 3 months, and also on an annual basis. It’s in your best interest to provide this report regularly as it proves to the surety company that you are reliable. The benefit of this is that you are more likely to be granted generous surety rates.
How much do they Cost?
Subdivision bonds do not come at a standard cost. You will find that different surety companies provide them at different rates. And of course contractor A and contractor B are likely to be charged differently based on their experience as construction experts and their credit/financial situation. Admittedly it can be a bit frustrating to not have any idea how much you might be charged, though it is possible to do research.
Generally speaking, it’s advisable to get in touch with multiple surety companies and ask them for their rates so you can contrast and compare what is the best decision for you based on your budget. Finding these surety companies is fairly easy now as you can conveniently search for them on the internet.
How do You Benefit?
Pursuing a subdivision bond can also be fairly beneficial to a contractor/developer. The following list covers how:
- You will find that your balance sheet is not encumbered by the subdivision bond as subdivision bonds are considered off-balance sheet security
- Meeting the financial needs of a project is much easier as you gain access to a considerably large amount of money
- Making use of a subdivision bond also provides access to bank financing which can be used to foster the growth of your company
As you can see, pursuing subdivision bonds is a fairly attractive option for contractors.