KGE Real Estate

Josh Kayser from Surety Bonds.com is back for his last day with us, with his last of a 3-part series on Contract Bonds.

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Contract Bonds are often called Construction Bonds. The latter is a catch-all term that covers a host of different types of bonds that are associated with a construction project from start to finish. Essentially, Contract Bonds ensure that project owners are protected in the event that a contractor does not fulfill his or her duties as specified in a contract.

There are seven major types of Contract Bonds: Bid Bonds, Maintenance Bonds, Performance Bonds, Payment Bonds, Supply Bonds, Site Improvement Bonds and Subdivision Bonds.

Today, we’ll look at Supply Bonds, Site Improvement Bonds and Subdivision Bonds.

Supply Bonds

Supply Bonds are a standard element of a construction project and required for public works projects. These bonds ensure that materials suppliers provide the requisite supplies for a project as specified by the contract. Supply Bonds also provide a degree of financial protection for the purchaser in the unlikely event that a supplier defaults.

All public projects with a value of $100,000 and above must include Supply Bonds, as per federal law. But most states have similar mandates that require Supply Bonds for projects that require the expenditure of public tax dollars. These bonds are also common to private projects.

Supply Bonds are often garnered during the beginning phases of a construction project, long before shovels hit the ground. They are typically cheaper than other types of Contract Bonds.

Like the others, rates will vary depending on the market, the size of the job, the contractor’s unique financial history and a few other factors. Surety companies try to ascertain whether a contractor can pay for the value of the bond in the event of a claim.

Site Improvement Bonds

Site Improvement Bonds are specific to existing structures. These bonds guarantee that contractors make improvements to existing structures as per current and applicable building codes and governmental regulations.

These bonds guarantee the completion of improvement such as curbs and gutters, sidewalks, utilities, grading, storm drains and streets. Site Improvement Bonds typically delineate the estimated cost and anticipated time until completion.

Site Improvement Bonds can prove crucial for contractors, who often must obtain these bonds before acquiring construction permits. These bonds can come in several forms, including:

• Certificates of deposit (CDs)
• Cash, certified cashier’s check or money order
• Irrevocable letter of credit issued by a bank, credit union, etc.
• Corporate surety bonds

Surety bonds are the most common avenue, as the others have the potential for unique problems and issues. Banks can seize property immediately if they choose not to renew a letter of credit. CDs and cash can tie up capital.

Subdivision Bonds

Subdivision Bonds are specific to new structures. They do not work with existing buildings.

These bonds are required by municipalities or states in which a subdivision is to be constructed. They basically guarantee that the contract will be followed and cover multiple areas of a construction project, from streets and houses to drainage areas. Subdivision Bonds are often required before plats can be filed with a city or county.

Like Site Improvement Bonds, Subdivision Bonds can take several forms, including surety bonds, letters of credit and cash. Bond amounts typically vary by geographic location and depend on the size of a project. A contractor’s unique financial status will likely dictate in part rates and terms.

The market for Site Improvement Bonds has improved in recent years.

To learn more about Contract Bonds and other types of surety bond, visit www.suretybonds.com.

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Josh Kayser is a principal with Surety Bonds.com, a nationwide surety bond agency focused on consumer education and surety bond news updates.