In construction the number one rule is to control the costs. The budget is the most important part of any construction projects. Projects that can be completed on time and under budget usually have the best chance at success. There are many things that can quickly derail the budget. It is important that the right decisions are made about how money is to be spent if a project is going to succeed.
One of the things that will often be necessary is the purchase of different surety bonds. Surety bonds guarantee payment for parts of the project if the money for the project runs out. One of the bonds that need to be considered is a subdivision bond.
What is it?
A subdivision bond is often called by other names. These names include completion bond, performance bond, plat bond and site improvement bond. One of the things that set the subdivision bond from the rest is who is responsible for paying for the bond. The bond can be used to guarantee the owner of a property or the developer of the property. It is normally paid for by the developer of the property.
Subdivision bonds are used by developers to make sure they complete all of the improvements that re promise in a development. There are many developments that have run out of money before they were finished. This unfinished work can cause the value of any completed work to go down. Houses built in a development are planned out. The roads needed for the development and the services that will be provided are all a part of the value of the homes in the development. This bond will help ensure that the properties are worth what they are supposed to be worth.
What to expect from a subdivision bond
It is important to know how the subdivision bond works. It is similar getting a loan. The issuer of the bond will check the credit of the individual who is applying for the bond. Anyone with bad credit will have difficulty obtaining a subdivision bond. The credit score of the individual or business applying for the loan will also impact how much the bond will cost.
The cost of the bond is based on a percentage of the bond amount on an annual basis. The fees on the bond will go down every year as the project is completed. It is important for the developers to obtain letters of clearance as the different parts of the subdivision are completed.
A claim will be filed against the bond if the developer fails to meet the required improvements or additions that they promised in a project. The individual that is harmed by these unfinished portions will be able to file a claim against the developer. The developer will be required to repay any money that is paid by the bondholder.
Subdivision bond or line of credit?
Some developers will wonder if they would be better off turning to a line of credit instead of getting a subdivision bond. There are a few reasons that make the subdivision bond a better choice than a line of credit.
- Upfront costs – The bond requires a percentage of the total amount needed for a contract to be paid up front. The line of credit means that the developer will have to insure the entire amount of a contract with the line of credit. The costs for doing this are much higher.
- The issuer of the bond will have a team in place to help prevent any false claims. The line of credit does not offer his type of service
- The letter of credit can tie up funds – When you have a line of credit and have to use it to guarantee that the work will be completed, you are tying up cash that could be sued elsewhere. The biggest reason for failure of these projects is a lack of cash and the bonds can help prevent this from happening.
It should make sense to developers to get a subdivision bond. It is one expense that should be figured into the budget