What Is a Permit Bond?
In the construction industry, a permit bond is a type of commercial surety bond typically required by a local municipality, state or federal agency as a condition for obtaining a permit for certain projects. When required, permit bonds provide a form of financial guarantee for the entity requesting the bond (the obligee), that a contractor (or property owner) will comply with all applicable laws, ordinances and building codes related to the project being performed, in much the same way as a license bond ensures ongoing legal compliance for contractors. Like other surety bonds, these bonds are generally fully indemnified and must be paid back to the surety in the event of a viable claim payout, unlike insurance. Examples of common permit bonds in the construction industry include grading bonds, excavation bonds and encroachment bonds.
What Is the Process for Obtaining a Permit Bond?
Depending on the type of bond being requested, the permit bonding process begins with properly identifying the appropriate bond being required, as well as the bond amount. Contractors can usually obtain documents containing this information from the government entity requiring the bond. These documents generally include the bond request form which outlines the bond being requested, a letter stating the particular bond requirements and the bond form required by the entity requesting the bond. Once our underwriters have this information, the process to quote and issue many permit bonds is relatively simple depending on several factors including the bond size and the applicants ability to be bonded.
License and Permit Bonds vs Insurance
Although these types of bonds can be considered to be a kind of insurance, permit bonds and insurance are not identical products. A permit surety bond is an indication to consumers that money has been set aside by a company as protection if a contractor does not follow through on what they say they will do, or other issues arise. They are important for protecting the parties involved from loss.
How Much Do License and Permit Bonds Cost?
Most permit surety bonds can be issued right away, without underwriting, typically for just 1% of the total bond amount. For example, if your required bond amount is $10,000, you will only need to pay a $100 premium.
Although most permit bonds can be issued right away, there are situations where the bond must be reviewed by an underwriter before the final cost can be determined. When bond purchasers are evaluated, the price that they will end up paying is mainly dependent on their current credit score. The better their credit score, the lower the premium they will be required to pay.
While credit is an important determining factor, underwritten bonds can still be purchased with bad credit. The downside is that they will cost more than someone purchasing a bond with good credit might have to pay.
Common Types of Permit Surety Bonds:
Grading bonds are generally required for projects over a specified size where a contractor or property owner is seeking a grading/building permit. The bond ensures that the work being done is performed according to the approved set of plans specified in the permit.
An encroachment bond is often required on certain projects where work being performed on private property could encroach upon government land. The bond ensures that government land is protected in the event it is intentionally or unintentionally altered or damaged in the construction process.
An excavation bond is a type of permit surety bond required in connection with earth moving activities.