Why Might a Builder Need a Bond? The Simple Guide to Construction Bonds

Rob is a commercial builder. After submitting construction plans to the township, he was informed that his project was approved with one provision: aside from the office building he would construct, he must make certain enhancements to the street site. These improvements included a sidewalk, street lights, shrubbery, and a parking lot as well as a garage

As per standard procedure, the Township’s engineer came down to the building site to calculate the cost of their stipulated improvements. His approximate assessment of $60,000 seemed logical to Rob who viewed it as an investment that would only add to the profits he would eventually rake in.

At this point, the Township wanted a form of guarantee that Rob would in fact complete the improvements within a suitable time frame. They asked Rob to lock $60,000 into a bank’s escrow account. Rob understood that if he would follow this directive, the funds would be inaccessible until all aspects of the improvement would be completed. The notion didn’t make business sense and he turned to an alternative in the form of a site-improvement bond that can be obtained from an insurance agency.

The Sensible Alternative: A Construction Bond

A construction bond or site improvement bond is offered by an insurance company. It serves as a guarantee to the Township that the builder will complete their specifications. As guarantor, the insurance company pledges that it will provide the capital needed for the job to be finished, in the event the builder does not come through.

The construction bond is the functional route to the Township’s requirement and allows the builder to free up his money while only paying insurance premium costs as he commits himself to completing his obligations. Approval of the initial bond application is similar to that of a mortgage’s.

Read about:   2020 FHA Mortgage Loan Limits for all Counties in Arizona (AZ)

Aside from the standard conditions to insurance underwriting, Rob needed to present the engineer’s assessment of improvement scope together with the estimated beginning and end construction dates, and approximate cost and sum of bonds.

In all, Rob was required to provide corresponding paperwork: site improvement request form, contractor answer sheet, appraisal of the project, assessment of the engineer, plot copy, agreement of the improvement, personal and business financial statements, credit release, verification of bank account and proof of capital funding.

Before long, Rob’s application was approved. Following his submission of the insurance bond certification, Rob began construction minus collateral and with just the cost of an insurance premium. When the office building was finished, it proved to be as profitable as Rob had imagined!