A subdivision bond, also referred to as a site improvement bond, completion bond or plat bond, is essentially a performance bond however there is a key difference that significantly enhances the developer's and and the surety's risk under the obligation. A contract surety bond guarantees that that a principal (contractor) will complete a specific project in accordance with contract specifications, within the time frame and job/cost estimate submitted by the principal. Generally, failure of an obligee (project owner) to fulfill his or her bilateral agreements with the principal and/or failure to pay the principal excuses the principal from performance under the surety bond. In contrast, a subdivision bond guarantees that the principal will complete the elements that will become part of the public domain regardless of whether or not the principal receives payment. Simply put, the site improvement bond guarantees "completion of the improvements" rather than "fulfillment of contract" without the benefit of a contract balance to offset the costs of completing those improvements. To further complicate the risk picture, there is often a mortgage company or financial institution involved in financing the project leaving the principal and surety exposed to dual-obligees. The disparate and often contradicting interests of dual-obligees drastically increases a surety company's exposure. Like standard contract surety bonds, the plat bond also provides a guarantee of materials and workmanship of the improvements.
A subdivision bond can be onerous by its very wording. Surety bonds that guarantee any sort of "repayment", a "lender's bond" for instance, can obligate a surety to pay a finance institution on default. Unless the developer/contractor has an equity interest in the site AND the bond forms guarantee only construction completion, a surety company may require collateral or evidence of a set-aside account in which project funds are held in escrow. It is also common for a surety to require the insertion of a "savings clause" in to the form. Completion bonds can be long term and like standard performance bond obligation are not cancelable.
Site improvement bonds are underwritten very carefully. A surety bond underwriter must understand the guarantees unique to the particular improvement agreement. The bond applicant must possess the financial healthy, appropriate experience with subdivision development and a history of successful completion of work of similar size and scope. An underwriter's focus will be on clearly understanding:
Subdivision bonds serve the public good and can support a principal's participation in a lucrative contract class. These surety bonds ultimately ensure that purchasers of properties within the subdivision or developmental zone will enjoy properly installed improvements and the municipality in which the subdivision is located is not burdened with the cost of those improvements.
National surety bond leader, Surety One, Inc. is a specialist in providing for the bonding needs of general contractors and developers. We offer this class of surety bond and miscellaneous performance bonds to all applicants in every state and municipality. Call (800) 373-2804, email Underwriting@SuretyOne.com or click here for a live chat regarding a subdivision bond application or to discuss your particular needs.
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