Surety Bond Now a Valid Performance Guarantee for NC Developers (guest post)
Welcome summer days! Today we have a guest post by Todd Bryant, president and founder of Bryant Surety Bonds. He is a surety bonds expert with years of experience in helping contractors get bonded and start their business. While design professionals generally don’t have to deal with performance bonds directly, they are often at the front lines of advising owners as to various Requests for Proposals submitted by hopeful contractors. In that spirit, be sure to read how the new law changes security requirements.
Take it away, Todd!
Last year wrapped up with some good news for North Carolina subdivision developers: House Bill 721 confirmed that construction bonds are, in fact, a viable form of performance guarantee. Previous legislation was ambiguous on this point, but the new bill– which took effect last October– sought to clear up the confusion. Although the new rules have been in effect for eight months, there’s been scant coverage of the changes, and what they mean for developers.
City Ordinances for Subdivisions
HB 721 is a revision to a section of North Carolina General Statutes, which authorizes cities to regulate land development with their own subdivision control ordinances. Ordinances are meant to ensure that land is developed in an organized fashion, to avoid overcrowding and congestion.
Cities have the discretion to set their own requirements for developers. Usually, cities ask developers to include certain features in new subdivisions, to fit in the city’s infrastructure. These might include recreational space for residents of the development, or building easements for existing roads and utilities. Some cities will allow developers to furnish funds for these public improvements, instead of building them themselves. Often, ordinances ask for detailed, up-to-date plans throughout project construction, so any changes can be approved by the city in advance.
To prove that they will follow local ordinances, subdivision developers must usually furnish the city with some kind of performance guarantee. According to the new bill, a surety bond officially meets the criteria for this guarantee.
The Facts on Surety Bonds
If you’re a design professional or developer in North Carolina, you’re probably familiar with these bonds already. Construction bonds, also known as contract bonds, are usually required of contractors who take on public construction projects. More and more, large private projects are requiring these bonds as well. There are a few different types of contract bonds, including bid bonds, payment bonds, and performance bonds, but they all serve a similar function. Contract bonds work like a line of credit for the developer, to ensure the project is completed on time, and according to the stipulations of the contract.
North Carolina HB 721 relates primarily to performance bonds, which are the type of contract bonds that cities will most often require from subdivision developers. With this new law, construction bonds are officially recognized as a valid form of performance guarantee that North Carolina subdivision developers can submit to demonstrate that they will follow all city ordinances.
HB 721 also includes some guidelines about how big this surety bond must be. Although cities will have the authority to set the bond amount on a case-by-case basis, it can’t exceed 125% of the estimated project cost.
Of course, surety bonds aren’t the only kind of performance guarantee that’s acceptable. Developers will still have the option to submit a letter of credit instead, or some equivalent security. However, the amount of credit that’s needed to satisfy this requirement is usually out of reach of some smaller developers.
Posting a bond requires much less capital than submitting a letter of credit, since the bond cost is only a small percentage of the total bond amount. The clarifications in HB 721 could be a boon for North Carolina developers who want to grow their business, as it could enable them to take on bigger projects. City officials in North Carolina are pleased with the new law, as well, as they believe this will make compliance and accountability easier, for government officials and subdivision developers.
If you’re a developer with questions about local ordinances, make sure to check with zoning officials in your subdivision’s city or county.
Thanks Todd for your article! Readers, if you have questions or comments about how HB 721 affects your projects, feel free to share in the comments.
Image source: https://flic.kr/p/9KpZH