What Is a Subdivision Bond?
A subdivision bond is a contract between a principal, an obligee and a surety that ensures that the principal will fulfill agreed-upon obligations, or reimburse the obligee a certain amount of money in damages if the principal fails to fulfill obligations of the contract. The agreed upon conditions for a subdivision bond usually include the building or upgrading of sidewalks, drains, improvements to grade and construction of other land subdivisions.
Subdivision bonds are used in the construction industry when developing land. The developers are required to develop subdivisions of the land like gutters, sidewalks, drainage channels, etc. by the government as part of the requirements for the obtainment of permits and licenses. The principal is usually the contractor, the obligee is usually the government and the surety is a bond or insurance company.
How Do Subdivision Bonds Work?
Subdivision bonds are different from other types of contract bonds because, unlike others where the obligee pays for the work being done by the contractor, the subdivision bond transfers the financial burden of the contract to the principal. For example, when a developer seeks to develop a parcel of land, the local government may require that he take out a subdivision bond. When this is done, the developer will be required to build the gutters, curbs, sidewalks, etc. around that parcel of land within a period of time and then transfer ownership of those subdivisions back to the government.
This type of contract bond transfers all financial burdens of the contract to the principal. Bond companies do not usually offer this type of bond, but those that do do so after taking into consideration some criteria. These criteria are:
- Scope of work: This includes information on what installments will be made, how the work will be carried out, to what extent, and for how long.
- The cost of work: This is an estimate of how much all improvements or construction of subdivisions will cost. Developers may be required to submit an estimate.
- Source of funding: All the financial burdens of a subdivision bond falls on the developers. As such, bond companies require that money be made available by the developer specifically for the fulfillment of the bond contract.