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The Difference Between Subdivision and Performance Bonds

When it comes to real estate, in different jurisdictions, some statutes require the developer or owner of real property to provide financial security to guarantee the completion of all the designated improvements. The guarantee that is posted by the owner or developer serves the following purposes: the developer has the financial resources to cover all the improvements, the improvements will be completed within a specified time, and the developer will provide a one-year guarantee for the maintenance of the improvements made against defective workmanship. This can be achieved through the use of different bonds. Read on to learn the difference between subdivision and performance bonds.

Important Distinction

Subdivision bonds are also known as plat bonds, improvement bonds, completion bonds, or just performance bonds. They differ from contract performance bonds in that the developer or owner (also known as the Principal) must pay the costs of undertaking the bonded improvements instead of the public agency or the Obligee. In other cases, the general contractor may agree to post subdivision bonds on behalf of the developer. Understanding the nuances and intricacies of these bonds is crucial, which is why consulting a comprehensive pre-construction guide or other online resources can provide invaluable insights and guidance.  In most cases, the contractor has a contractual right to stop working if the project owner fails to pay. However, when the general contractor provides the improvement bonds, they are obligated to complete the project.

What is a Subdivision Bond?

To get a clear understanding of what the differences between performance bonds and subdivision are, it is imperative to define the two terms. A subdivision bond refers to an obligation that is put in place by the regulating authority in a specific jurisdiction upon the developers or contractors of the project. This type of bond aims to protect the project owner from suffering undue losses if the contractor fails to complete the work.

Subdivision bonds are required when contractors start work on a subdivision building project since they guarantee that the contractor completes the improvement work within the required time frame. There are different types of improvement works that may be undertaken, and these include electrical upgrades, grading changes, sidewalk maintenance, and others. In other words, a subdivision bond acts as insurance to ensure that the government agency will get money to complete the project if the contractor fails to do it on time. A subdivision bond includes the following key players:

  • The principal is the business owner or contractor who buys the subdivision bond
  • Oblige- the local government agency that requires the bond
  • Surety- this is the subdivision bond’s underwriter

When you purchase a subdivision bond as a landowner, contractor, or developer, the surety will agree to pay the costs of land improvement to the obligee if you fail to complete the required project.

What is a Performance Bond?

A performance bond is between the two parties that include the project owner and the developer. The contractor purchases the bond, and the project owner receives it, not the state regulating authority. Performance bonds are specifically designed to guarantee that the project is completed according to all the terms of the project’s contract. These bonds usually include payment bonds to cover labour and materials. The bond also provides maintenance liability.

Essentially, a performance bond protects the owner from financial loss if the principal or contractor fails to complete the project. The owner and the project developer create a contract based on specific terms and conditions, and this is where a performance bond comes into play. If the contractor fails to meet these terms, the bond will come into play to protect the owner of the project. In other words, a performance bond aims to ensure that you complete the project.

How Bonds Work

Undertaking a construction project does not always run smoothly. In some cases, several challenges may affect construction work such as lack of payment, which can affect the entire project. Both subdivision and performance bonds aim to protect the project owners against financial losses if the contractors fail to complete the project as outlined in the terms and conditions. However, you also need to understand that obtaining a bond requires you to meet certain conditions. The bond providers consider your credit history, and it might be expensive to get one if you have a poor history.

As you can see, subdivision or improvement bonds are provided by the owner of the project to the public agency to ensure that the developer pays the development improvements that are meant for the public. Another major difference from the performance bond is that the owner who provides the subdivision bond pays for the improvements instead of the obligee. These improvements may include lighting, roads, or sidewalks.

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