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Grading Permit Bonds 101, The Basics
Last updated on Wednesday, October 9th, 2013 No Comments
Grading Permit Surety Bonds are required by municipalities and basically guarantee that the party pulling the permit complies with the terms of that permit. It is often the last step in the long and tedious process of starting a construction project. To explain what it is, we need to start with some surety bond basics. A bond is a 3 part obligation, the three parties are:
Principal – the party that needs to provide the bond to the municipality, in this case usually a land owner or developer.
Obligee – in this case the Municipality, city, county or town that is requiring the bond.
Surety – is the insurance company that is actually underwriting the risk and providing the financial “teeth” of the obligation.
The amount of the bond is set by the obligee. Small municipalities may accept the engineers estimate obtained by the principal. It is not unusual for the engineers estimate and/or the bond amount to be well in excess of the quote to actually complete the grading required to satisfy the terms of the permit.
When is there a claim? A claim on a grading permit bond will be filed against the surety if the work included in the grading permit was not done according to theplans and specifications, not completed at all, or sometimes, a claim can be made by the contractor that did the work for non-payment.
Does the principal have the financial resources to complete the work? Remember, the fundamental purpose of the grading permit bond is to protect the obligee from having to use taxpayer money to complete or correct work covered by the permit. No one wants to look at an unfinished landscape, or worse yet, suffer from erosion and sediment control issues of an incomplete project. The surety bond protects the obligee and the surety does not want a loss so one of the primary underwriting considerations is proof that the funds are available to complete the project.
Has the principal contracted with a reputable, licensed contractor?The surety company will want to see that the principal has hired an experienced, licensed contractor to perform the actual work. Again, if the work is not done correctly and the principal has already spent the money, the obligation to correct the work will fall to the surety.
Are the bond forms and actual permit are fair and reasonable? The underwriters will want to review the actual permit and bond forms. This is the only way the surety can actually know what it is to guarantee. For instance, a municipality may add soil remediation or a long term warranty in the permit. the bond guarantees the permits the surety would be party to these obligations. Also, sometimes the bonds include a payment guarantee provision, protecting the subs and suppliers from the default of the principal.
Cost of the bond
There are a lot of variables that can impact the cost of the grading permit bond. that said, generally the bond can be obtained for an annual premium of 1 to 3% of the bond amount. This is an annual premium and it is the responsibility of the principal to provide closing evidence to the surety. Many times a principal will complete the work but not get the obligee to sign off on it until they get the bill for the second or third year of the surety bond.
Surety1 has an easy, online application process for grading permit bonds.