The municipality planning authority typically issues permits for any construction activity in a subdivision within its jurisdiction. A developer or contractor applying for a construction permit for the purpose of upgrading existing site improvements or making additional improvements will be informed of the bonding requirement and the required amount of the site improvement bond.
Site Improvement Bond for Projects
Developers need a site improvement bond when a municipality requires assurance for roads, utilities, drainage, or related work. Surety Bonds Agent supports clients in 50 states with direct quote help. Apply today for a site improvement bond quote.
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What Are Site Improvement Bonds?
When a developer or a contractor hired by a developer is seeking a construction permit to add or enhance improvements to a residential or commercial subdivision, the municipality with jurisdiction over the area is likely to require a site improvement bond. The intent is to provide financial protection for the municipality. After all, improvements such as sidewalks, roads, streetlights, curbs, sewers, and so on belong to the municipality; not to the developer or individuals or businesses that occupy the structures within the subdivision.
A site improvement bond guarantees that the work on such features will be completed as specified in the contract governing the improvement project. If the work is not completed or is deficient in some way, the municipality won’t be left in the lurch or stuck with the bill for getting the rest of the work done. The local government entity requiring the site improvement bond can file a claim against it to obtain the necessary funds to complete the project. Some site improvement bonds also guarantee payment of contractors, sub-contractors, and suppliers.
Site improvement bonds are often conflated with subdivision bonds because they are very similar. Both serve essentially the same purpose, though subdivision bonds are required when the work is being done on new subdivisions while site improvement bonds are required for work on existing subdivisions.
Who Needs Them?
How Do They Work?
The three parties to a site improvement bond, a legally binding contract, are referred to as the “obligee,” the “principal,” and the “surety.” The municipal planning authority is the obligee, the developer or contractor is the principal, and the bond’s guarantor is the surety. The principal’s violation of the terms of the surety bond agreement entitle the obligee to file a claim against the bond to recover monetary damages.
The principal is legally obligated to pay any claim that the surety decides is valid. However, as the bond’s guarantor, the surety typically pays a claim initially, which is an extension of credit to the principal. The principal must then repay that debt to the surety. Failure to repay the surety can result in the surety taking legal action against the principal.
What Happens if a Claim is Filed?
As the bond’s guarantor, the surety typically pays a claim initially, which is an extension of credit to the principal. The principal must then repay that debt to the surety. Failure to repay the surety can result in the surety taking legal action against the principal.
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What Do They Cost?
The annual premium for a site improvement bond reflects the underwriter’s assessment of the risk that the principal would incur claims against the bond and perhaps not repay the surety for paying them on the principal’s behalf. The primary factor taken into account is the principal’s personal credit score, which is indicative of the level of financial responsibility and creditworthiness.
A high credit score correlates with a low level of risk and is rewarded with a low premium rate (usually under three percent). Conversely, a low credit score signals a higher credit risk and warrants a high premium rate (potentially 10% or more).
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