A subdivision bond is a three-party agreement that insures a developer or contractor will makemandatory public improvements in a new commercial or residential development.

The Three Parties Involved

• The Principal: This is the builder or developer who is on the project and buys the bond.
• Obligee: This refers to the local government unit (city, county, or municipality) that demands the bond as a means of securing the public.
• The Surety: This is the surety issuing the bond and economically assuring the project is completed.

How It Works

When a construction contracting firm commits to constructing a new development, the local government demands a subdivision bond that ensures public infrastructure such as streets, sidewalks, water and sewe
rover pipes, and storm drains are constructed per plan and on time. It is often determined that the bond will be equal to the cost of the public improvements at 100%.

In the event that the Contractor is unable to fulfill the work as agreed upon in the bond—financial reasons, bankruptcy, or any other cause—the Obligee can bring the case before the bond. It will then be investigated by the surety. In the event that the claim is true, the surety will interfere as follows:

• Grant money to the government in order to finish the project.
• Get a new contractor to complete the work.

After the surety settles the claim, the principal (the builder) is legally bound to repay the surety the full token, plus any attorneys' fees. This is distinct from insurance; a surety bond is a credit, not a shifting of risk.

Subdivision bonds safeguard the public against the cost of incomplete or Wol standard work.

Subdivision bond claims are initiated when a contractor fails to complete public improvements as outlined in their contract. The process is a formal procedure handled by the local government and the surety company.

1. Filing the Claim: The obligee (the local government, such as a city or county) files a claim against the subdivision bond. The claim must provide clear evidence that the principal (the contractor or developer) has failed to fulfill their contractual obligations, such as not completing road construction or failing to install water and sewer lines.
2. Investigation: Upon receiving the claim, the surety company launches an investigation. They review all the documentation, including the original contract, project plans, and any communication between the government and the contractor. The surety's goal is to determine if the claim is valid and if the contractor is truly in default.
3. Surety's Response: If the surety's investigation finds the claim to be valid, they will take action to resolve the issue. The surety can choose to:
   • Fund the project: Provide the local government with the funds necessary to complete the unfinished work.
   • Hire a new contractor: Bring in a new, qualified contractor to finish the public improvements.
   • Pay the bond amount: In some cases, the surety may simply pay the full bond amount to the obligee, who can then use those funds to complete the project themselves.
4. Contractor Reimbursement: After the claim has been paid, the principal (the original contractor) is legally obligated to reimburse the surety company for all costs incurred. A subdivision bond is a financial guarantee, not insurance, so the financial risk remains with the contractor. The surety will pursue full repayment from the contractor, often through a legally binding indemnity agreement.

This process ensures that public infrastructure projects are completed, protecting the local government and taxpayers from the financial burden of a contractor's failure.

Cost of subsidy bond is a tiny fraction of the bond amount, which is generally between 1% and 5%. It is the premium, and this is an annual premium that is collected until the project is carried out, the bond is formally released by the obligee.

Factors That Influence the Cost

The termination price of your bond for subdivision is contingent on an underwriting process that calculates the risk level. Premium is arrived at through a number of critical factors:

• 
  Bond Amount: It is determined by the local government and is generally equivalent to the cost of the public improvements estimated. It will be a high premium if the bond amount is high.
• Personal and Business Credit: Your credit health is the biggest determining factor. Contractors with the best credit (Typical FICO score is 660+) will qualify for the lowest rates, which are often between 1% and 3%.
• Financial Strength: For larger projects, sureties will review the contractor's financial statements, including assets, liabilities, and liquidity, to ensure they have the financial capacity to complete the project.
• Experience: Evidence of a history of completing the same type of projects effectively is helpful in establishing credibility and can secure a reduced premium rate.

Example Cost Calculation

If your local government demands a $100,000 subdivision bond and your premium level is 3%, then the annual bond cost would be $3,000. If the construction project is a two-year project, then your total bond expense would be $6,000.

A subdivision agreement is a legally binding contract between a local government (like a city or county) and a developer or contractor. It outlines the terms, conditions, and timeline for the construction of public infrastructure within a new development. These agreements are directly tied to the bond industry because they are the basis for a subdivision bond. 

Key Components of a Subdivision Agreement

A typical subdivision agreement details all the public improvements the developer must construct, which can include:

• Roads and streets
• Water and sewer systems
• Drainage and stormwater management facilities
• Sidewalks and public lighting
• Parks or other public spaces

The agreement also specifies the quality of materials, engineering standards, and the project's completion timeline. In return for the developer's commitment to these terms, the local government grants approval for the project to move forward.

The Link to Subdivision Bonds
 

The subdivision agreement is what creates the need for a subdivision bond. The bond acts as a financial guarantee that the developer will fulfill their promises as outlined in the agreement. It protects the local government and taxpayers from the financial burden of incomplete or shoddy work.

Essentially, the subdivision agreement sets the rules, and the subdivision bond ensures the rules are followed. Without a valid subdivision bond, a contractor cannot sign the subdivision agreement and start the project.