How to get subdivision bonds when applying for a public construction project
Subdivision bonds are a type of contract bonds that are required when a builder/developer submits a lot map or seeks a building permit. By posting a subdivision bond, the principal of the bond promises to build and finance all improvements to a subdivision as stated in their contract. In case of a breach of the agreement, the surety comes in to cover all losses and will then require the principal to reimburse that amount. Most commonly, subdivision bonds pertain to work on streets, curbs, sewage, drains, etc.
Subdivision bonds are sometimes mistaken for site improvement bonds. The difference is that subdivision bonds are required for work on new construction projects, while site improvement bonds are needed for repairs on existing buildings.
What you need to know before you apply
To obtain a subdivision bond, your surety will ask you to provide detailed information about your business so as to assess whether you can obtain the bond and at what price. You can apply and get a quote online and here is a quick outline of the paperwork you will be asked to provide.
Financial statements are the most important. You will need business statements for your company, as well as bank statements and personal finance statements of all owners along with the ownership structure of the company. All this is necessary because when surety bonds underwrite your bond, they want to make sure you are financially viable and they are not getting into a risky deal.
A document that proves you have sufficient funding of the project is another essential. No matter how good your statements are, you can’t get a subdivison bond without showing where the money for the project will come from. Self-financing is also an option.
A copy of all applicable licenses is also a prerequisite. Most often this is the contractor’s license, but certain cases require other licenses, such as one showing you can operate with hazardous equipment, materials, etc.
The precautions don’t end here. The surety will want to receive resumes of all key employees involved in the project. They want to see if they have the experience and expertise to execute the project properly. To avoid potential claims and lawsuits, you also need insurance (active for the whole duration of the project) for all your employees as well as general liability and personal liability insurance.
A copy of the contract is required so that the surety knows exactly what kind of responsibility you have assumed towards the obligee. Finally, an engineer hired by the obligee will have to estimate what your work will cost. Based on that amount a subdivision bond amount will be derived.
How much a subdivision costs you
You don’t need to post the full amount of the bond. After a thorough evaluation of the aforementioned paperwork, the surety will give you a quote that is a certain percentage of the total bond amount you are required to post. You will pay an annual premium for each year you work on the project.
Your financial statements and personal credit score are the biggest determinants of your premium. Strong financials and a good credit standing will make sure you get approved and pay a smaller amount. A bad credit (typically 650 or below), bankruptcies, tax liens or civil judgments, however, will cause your application to be denied. Sureties always assume a zero percent loss ratio and currently most high-risk applicants can’t get bonded.
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