A subdivision bond, sometimes known as a performance bond or contractor bond, is required by many municipal districts for contractors that practice in their jurisdiction. The bond exists to protect districts from losing money if contractors fall through on government-related public improvements. These protect contractor customers from financial harm if a contractor fails to complete public infrastructure in subdivision projects. In the event of a failure, a municipality can will make a claim against the violating contractor’s bond to be compensated for the loss. Subdivision bonds ensure the completion of public infrastructure projects such as sidewalks, storm drains, reconstruction of streets, etc. The bond ensures project completion improves transparency between contractors and their customers.
There are multiple factors that determine the cost of a subdivision bond. Determinants include contract terms and sizes, the contractor’s work history, and credit score. The cost of a bond will be a percentage of the bond amount required, usually 1% to 5%, with 3% being the most common. Applicants with a lower credit score will need to pay more for their bond, while applicants with good credit score will receive more favorable prices.
For example, for a $25,000k subdivision bond, the contractor would only be expected to pay $500 USD, which is 3% of the bond. However, additional factors are used to determine this percentage.
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Subdivision Bonds are named for the specific association with the process of subdividing land for development in contract work with development. Land and projects are usually subdivided according to a subdivision plan. The subdivided lands must meet local zoning requirements.
Subdivision Bonds must be renewed every year until the public infrastructure project is completed. Renewing a sSubdivision bBond is like getting a new quote and will cost a certain percentage of the bond every renewable, usually around 3%.
Subdivision Bonds make a contractor present as more trustworthy and reliable to work with, additionally, they help keep untrustworthy contractors out of the industry creating more willingness to work with industry professionals by the obligees.
The process of acquiring a Subdivision bond begins with the contractor applying for the bond through a surety company. During this application phase, the company assesses various factors, such as the contractor's work experience, credit score, and the specifics of the development project. This underwriting process helps determine the contractor’s eligibility for the bond and establishes the bond's premium rate. Once approved, the bond is issued to the contractor with obligations set between the surety company and the contractor.
Most local municipal governments require Subdivision Bonds to be purchased by contractors who want to engage in infrastructure development for them. These bonds are also mandatory as part of zoning and land development regulations and are necessary when a contractor seeks to divide a large piece of land into smaller lots for residential, commercial, or industrial purposes. Contractors must secure these bonds early in the development process, as they are often a prerequisite for obtaining permits and approvals for the subdivision project. The timing and specifics of when and why subdivision bonds are required can vary by jurisdiction. It is best to verify with your local laws surrounding subdivision projects, as some jurisdictions require subdivision bonds for construction that exceeds a certain cost threshold.
When a claim is made on a subdivision bond, the process starts with an investigation by the surety company that issued the bond, to determine the validity of the claim and whether the contractor is in default. After the investigation, the surety company may choose to fulfill the bond obligations by compensating the obligee for the costs incurred. The amount paid to the obligee is determined by the circumstances of the claim. The principal, usually the contractor, remains financially responsible to the surety company for any payments made, and the company may seek reimbursement from the contractor for expenses related to the claim resolution process.
To avoid a claim being made on a subdivision bond, contractors should complete public infrastructure projects within the timeframes specified in the contract with the municipality, and contractors should verify that they have the funds to complete said projects and provide proof to underwriters. Thorough planning and organization of documentation will allow contractors to be able to have a better case if a claim is made on the bond. Another way to prevent a claim from being made is to upkeep communication and good relationships with the obligee to increase transparency around projects in general.
