Developer bonds go by many names including Site Improvement Bonds, Plat Bonds and Subdivision Bonds. Whatever you call them, the booming construction economy has also increased the need for these bonds. Here are some considerations for contractors, owners and developers on how to get one and what to look for.
What Do They Cover?
These bonds can cover a wide variety of things but usually they are put in place to make sure that infrastructure is completed on a project. This could include things like streets and roads, sewers, other utilities, curbs, ect. They usually protect the public by ensuring that these items will be completed regardless of if the Owner/Developer gets paid. This makes them a form of completion bond. You can read more about the bonds themselves here.
A very important piece of getting these bonds approved is the financing of the project. Things that a bond underwriter will be heavily interested in are whether the funds are set aside or dependent on future sales. Having the funds already set aside makes getting a bond much easier. An example would be that a bank has already approved and provided funding for the project. If we can verify that financing is in place from a reputable lender, the project will seem less risky to a surety underwriter. On the other hand, if the funds are contingent on the sale of the property or other properties, the bond will be viewed as high risk. In these scenarios, it is very important that the Owner/Developer have a strong balance sheet and bank relationship. The bond company will want to make sure that there is cash available to cover the obligations in the event that the property or properties does not sell.
Who Is Doing The Work?
A big consideration is writing Developer Surety Bonds is who is doing the work. Will the Owner/Developer be performing the work themselves or will there be other contractors? If there are other contractors, will they be bonded? A contractor who bonds back to the Owner/Developer makes getting a bond less risky and significantly easier. Be prepared to give a breakdown of the construction trades including the contractor, price of work performed, and estimated completion time on that phase. Even if the contractors are not bonded, having firm pricing and an accurate project timeline will make you more appealing to the bond company. Conversely, not knowing who will be doing the work and guessing on costs will make your bond look very risky.
Time and Warranty
In addition to the timing for each trade, how long is the project expected to remain open and how long is the warranty obligation? More time usually means more risk in construction. Project completion times of less than a year are much easier to bond than a project with a three-year completion. The cost can go up; the economy can go bad and many other things to increase the risks for both the Owner/Developer and bond company. In addition, all things wear out in time so having a reasonable warranty or maintenance period is essential. One year is normal, two years is acceptable, and anything longer will present more difficulties with the bond company. One potential way around this is to get the public entity (obligee) to modify the contract and bond form to include a mutual option. For example, you can provide a one-year maintenance bond with an additional three-year option of the obigee, Owner/Developer and bond company. Each year after the first twelve months, the obligation can be renewed for another twelve months by the agreement of all parties. We find this to be a good solution for obligees wanting a long-term warranty.
Unfortunately, not all Owners/Developers fit into an ideal underwriting box for bond companies. They may not be able to do some of all the things discussed. When this happens, some bond companies and underwriters want collateral in the form of an Irrevocable Letter of Credit (ILOC). We often suggest using escrow as an alternative. First, many Owner/Developers are familiar with this concept as it mirrors a construction loan in many ways. A third party holds the funds until the work is completed and then pays the contractors and suppliers. As a second benefit, neither the project funds nor the Owner/Developer’s funds are tied up and can be used for the project instead of sitting idle for the bond company’s benefit. You can read more about this process here.
Completion Bonds and Costs
As mentioned earlier, usually these bonds are considered to be completion bonds which mean they are considered riskier than a typical performance bond or payment bond. That also means they generally cost more. Most bond companies have some rate flexibility with their rate filings, but many are flat rates that cost more than other bonds. Also, these bonds are generally excluded from the typical credit-based model underwriting models. That means more underwriting information may be necessary and you probably can’t get one through your typical insurance agent. MG Surety Bonds has many bond companies who like developer bonds and we have the expertise to help you get what you need. Contact us today, we want to be your bond broker for life!