Suretyship is one of the oldest professions in the world, but few are familiar with the industry. In a way, a surety bond is similar to having a co-signer for an obligation. It is viewed as an extension of credit.
If the developer of a project fails to build what is included in the engineer’s estimate, the surety would have to step in and complete the work, hiring (and paying) a contractor to finish the work — or pay the obligee (the governmental entity that is requiring the subdivision surety bond). The bond is a financial guarantee of payment, which is why in order for a surety company to underwrite a matter, a developer’s financial statement will be required.
The surety will also want to know about the sources and use of the funds. Where are the funds coming from to build the subdivision, and how will those funds be used? A major issue with subdivision surety bonds occurs when the developer runs out of money and is unable to complete the development, which can lead to a claim on the bond. The surety will want to see that the developer has financing or enough money on hand to complete the work.
At the end of the day, a surety does not want to guarantee a project that the developer has no money to work on. This does come up because sometimes the developer wants to get the project platted so that they can sell the plats, but they are still on the hook for the improvements. The surety wants to know how much they’re going to need, their financial wherewithal, and their credit. You must make sure you have a financially viable, and credit-worthy developer because, at the end of the day, the bond is a credit instrument. It’s basically a financial guarantee that the money is going to be there to pay for the work. The surety will want to know everything they can about this developer, to make sure that they are not going to be left holding the bag.
The engineer’s estimate is an important item since it lists the work that needs to be performed. If there is a deficiency or item not performed, the surety can refer to this to see if it was included in the engineer’s report. The surety also needs to know what they are actually guaranteeing work-wise. Which contractor does the developer plan to hire to perform the work, and does that contractor have experience in the building of this type of project and work?
The main items of underwriting are the financial wherewithal of the developer, the sources of financing, the qualifications of the contractor, and the work that needs to be performed.
If you are contemplating a development project, give me a call or send me an email, so we can start the subdivision surety bond process immediately. That way, you won’t get stuck without a bond in place when the governmental entity gives the go-ahead. Preapproval for a surety bond is necessary so that you know exactly what is needed to obtain the bond before it is required.
Sign up for Our Newsletters