Do You Need a Site Improvement Bond?

Posted: July 10, 2019

A site improvement bond is a way to ensure that improvements being made to an existing public property will be done as agreed upon in the project contract and in accordance with local building codes. Typical improvements made under a site improvement contract include sidewalks, curbs and gutters, utilities, landscaping, grading, streetlights, storm drains or sewers, and streets.

Don’t confuse a site improvement bond, which is used when improvements are being made to existing structures, with a subdivision bond, which is used for new construction. Obtaining a site improvement bond is a common requirement for getting a construction permit for a project.

Who Needs One?

Any developer/general contractor awarded a public works contract to make improvements to an existing structure or subdivision will most likely be required to obtain a site improvement surety bond before a construction permit will be issued.

How Does It Work?

There are three parties to a site improvement bond:

  • Obligee. The obligee requiring the bond is the public agency awarding the contract to a developer/general contractor.
  • Principal. The principal is the developer/general contractor required to purchase the site improvement bond.
  • Surety. The surety is the company underwriting and issuing the bond.

The principal is responsible for paying for making the improvements specified in the contract and making them in compliance with applicable building codes. Failure to do so can result in the public agency filing a claim against the principal’s site improvement bond for the cost to complete any unfinished work, redo substandard work, and provide compensation for damages or losses sustained.

Upon receiving a claim, the surety will conduct an investigation and attempt to resolve the matter amicably. If the claim is found to be valid, and it becomes necessary to make payment to the claimant, the surety will pay the claim amount initially but will then seek reimbursement from the principal. Nearly all surety bond contracts include an indemnification clause that places the financial burden of paying claims squarely on the principal’s shoulders.

How Much Does It Cost?

The obligee sets the required amount of the bond, also called the penal amount, at a level that provides adequate protection for the obligee against any financial loss stemming from the principal’s failure to comply with applicable building codes. This penal amount is the maximum amount that will be paid to claimants and depends on such factors as the value of the project, the project duration, and any state requirements pertaining to site improvement bonds.

The premium the principal will pay for a site improvement bond is determined by the surety on a case-by-case basis. One of the key considerations is the principal’s personal credit score, though personal and business assets may also be taken into account. Applicants with good credit and financial strength typically pay a bond premium based on the standard market rate, which is between 1% and 3% of the bond penal amount.

Get Bonded Today

It’s best to work with an experienced construction bond professional to ensure that you obtain a bond that meets all of the obligee’s requirements at the best possible premium rate. Contact Contractor Surety Group today to request a quote.