What Is a Subdivision Bond?
A subdivision bond, also called an improvement bond, is a type of contract bond required by some state and local governments prior to making improvements to land within a subdivision. Landowners may need to secure these bonds to make improvements involving electrical lines, sidewalks, grading, sewers, etc. The subdivision bond covers every aspect of construction, guaranteeing that the required improvements are completed correctly and on time.
Types of Subdivision Bonds
Subdivision bonds safeguard municipalities and property buyers alike, offering financial guarantees for the successful completion of subdivision projects. Within this category, several specific types of subdivision bonds exist, each serving a distinct purpose.
Subdivision bonds are also known as:
- Developer bonds: Developer bonds act as a form of insurance for local municipalities, ensuring that infrastructure enhancements, such as roads and utilities, are carried out as specified in the approved development plans.
- Land improvement bonds: Land improvement bonds focus on the enhancement of raw land to finance projects that go beyond basic requirements of subdivision development, covering grading, landscaping, and more.
- Site improvement bonds: Site improvement bonds address the infrastructure and amenities directly associated with individual construction sites. Developers obtain them to ensure proper installation of utilities, sidewalks and more.
- Plat bonds: Developers seeking approval for subdivision plans need plat bonds, which guarantee that the proposal represents the intended layout of the subdivision and adhere to the design during development.
- Completion bonds: Completion bonds provide assurance that a developer will finish a project according to the approved plans and within a specified timeframe. Municipalities often require completion bonds.
- Performance bonds: Performance bonds are a broad category of surety bonds that include subdivision bonds. They guarantee that a developer will perform all aspects of a subdivision project in compliance with local regulations and contractual agreements. Performance bonds provide financial security for both developers and municipalities, fostering accountability and ensuring successful subdivision development.
Subdivision Bonds vs. Performance Bonds
While some may refer to subdivision bonds as performance bonds, there is one major difference between them. With a subdivision bond, the principal of the subdivision bond must pay the cost of the project rather than the obligee, regardless of who the principal is. Traditionally, the owner or developer secures the contract bond for construction. If the contractor agrees to do that, then the contractor is obligated to complete the improvements and pay the bills, whether the owner or developer pays the contractor or not.
Who Needs Subdivision Bonds?
Subdivisions are a growing construction segment, and government agencies require improvement bonds to ensure that contractors meet project expectations.
There are two benefits for the obligee:
- In the event the contractor fails to complete the subdivision project, the surety will provide the required money to complete it according to the terms of the contract bond. The surety will then require the principal to reimburse them for the full amount paid.
- Subdivision bonds allow developers to file plats with the county or city before completing construction of the development. The accuracy of the plat is important because it gives an accurate description of a section of land as well as the people, things, and access ways on the tract.
How Much Do Subdivision Bonds Cost?
Understanding the cost of a subdivision bond involves considering several key factors, which range from contract size to work history and more. The premium cost of a subdivision bond is typically 3% of the bond amount, but that can vary based on the above.
Subdivision improvement bond cost is based on the following:
- Contract size and terms
- Dollar amount of the requested bond
- Principal/contractor work history
- Principal/contractor credit score
- Principal/contractor financial qualifiers
The premium cost of a subdivision bond is typically 3% of the bond amount, but that can vary based on the above. To find out how much your subdivision bond will cost, request a quote today.
How to Apply for a Subdivision Bond?
The process for applying for a subdivision bond is the first important step in the successful execution of development projects. To initiate the application process, applicants must understand the specific requirements and procedures involved in obtaining a subdivision bond.
Subdivision bonds typically require the following:
- Background check and additional financial information
- Information on the principal’s capacity, experience, finances, and character
- Credit check
- Bond application
- Project scope
- Project cost
- Project funding source(s)
For certain types of projects, the surety may require the following:
- Three year-end financial reports
- Personal financial statements
- Project completion history
- Banking information
- Business plans
- Applicable partnerships, trusts, or operating agreements
Why Choose Brunswick Companies
Your Brunswick Companies contract bond specialist will simplify the process of getting your specific subdivision bond quoted and processed. Request a quote to get started.
Your Brunswick Companies bond specialist will let you know exactly what you need to provide to get your specific subdivision bond quoted and processed.