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The How, What and Why of Construction Bonds

How the Builder Freed up his Money the Economical Way

 

Meet Bob Brant.

As a building contractor, he’s accustomed to answering to NJ government regulations. So when the Long Branch Township approved his plans for construction of a commercial building on condition that he enhances the intended street site with trees, sidewalks, lighting, and a parking lot with a garage, he knew there was no choice.

Following regular protocol, the Township then sent down their engineer to assess what the cost of these additions would be. At an estimated $55,000 on top of his initial building expenses, Bob still thought the deal was a worthwhile investment.

RELATED: How to protect your contracting business

                                                               

Standard to the situation, the Township was concerned if there would be a timely completion of the improvements. The Township wanted a guarantee that Bob would actually come through. An official informed Bob that he needed to secure $55,000 into an escrow account that would be untouchable until he completes his job. Bob couldn’t afford to lock up his money as an assurance like that so the township suggested an alternative – a site improvement bond from an independent insurance agency.

SITE IMPROVEMENT BOND – WHAT IT MEANS AND HOW IT WORKS

With a bond, the insurance company provides a degree of protection by guaranteeing that the builder will complete stipulated improvements.  In the event the job is not completed, the insurance company acts as the guarantor that provides the money for construction. A relatively cheap alternative to the bank, the site improvement bond requires insurance premium payments from Bob with the assumption that he will in fact be responsible for his public building commitment. Initial approval resembles a scrupulous financial background check, similar to that of a mortgage application.

Besides standard underwriting conditions, prior to approval, Bob was required to provide the engineer’s calculated scope of the improvements, including proposed date of commencement and completion, estimated cost and amount of the bonds.

Primary Underwriting Concerns:

  • scope of work

  • cost of work

    and most importantly 

  • how work will be funded (documentation needs to be provided that further funds will be set aside in the event completion date is extended and ultimate cost proves to be greater than estimated)

Bob’s application necessitated highly organized and detailed paperwork:

  • Site Improvement or Subdivision Bond Request Form

  • Completed Contractor Questionnaire

  • Project Appraisal

  • Engineer Estimate

  • Copy of Plot

  • Improvement Agreement

  • Personal Financial Statement

  • Credit Release

  • Bank Account Verifications

  • Business Financial Statement

  • Source proof of Capital Funding

Within a reasonable amount of time, Bob was approved. After sending in his insurance bond certification to the appropriate department in the Township, he was able to start his project as planned, without collateral and with only an added insurance premium to contend with.     

                                       

The finalization of the corporate building was a profitable pride to the owners, the Township and, most assuredly, to Bob the Builder.  It was a worthwhile deal on all accounts. 

For more information, visit http://www.primeins.com/ or contact us.

Summary:

A Bond is the smart choice for the builder that must guarantee site improvement to the governing authority. Opposed to opening up an escrow account, it frees up your money so that you can make it work for you. Furthermore it is a far cheaper option than the bank, with only the insurance premium to contend with. Application procedures are quite scrupulous, resembling mortgage requests. Going to an experienced independent insurance agency, such as PRIME Insurance Agency who will scout the best bond source for your circumstance ensures an optimal deal, allowing you to move forward in construction.


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