Bonding is a term used in a number of contexts for people involved in the land development or building sectors. Below are two of these uses.
In the land development sector, suppose a developer has a land sub-division requiring $10 million worth of civil work and provision of essential services, but has only completed $7 million worth of civil works. In these circumstances the developer may provide a $3 million “performance bond” to the local authority for the uncompleted works which is refunded to the developer once all the works and services are completed. This bond is a safeguard to the local authority that the works will be completed.
The advantage to the developer of “bonding” is that it speeds up the approval process, allows for Council clearance and issuance of land title so that settlement on the presold block can take place and the developer gets paid. Rather than wait for the civil works and installation of all services like power and water to be completed on the whole sub-division, bonding allows for a streamlining of the title release process so that outstanding civil works can be completed simultaneously with the final stages of title release thereby saving the developer time and money. The only possible downside of this is that titles can be available to the land buyer before all services are completed, but this would be a rare occurrence.
Another common use of bonds occurs at the building stage. Local authorities will usually require a bond or “footpath deposit’ payable by the builder in case damage is done to existing footpaths by trucks or heavy machinery during construction of a new home. If damage does occur, the cost of rectification work by the local authority is deducted from the bond. The bond is usually refundable at completion of the building work. Local authorities differ in the amount of the bond – ranging from several hundred dollars to over $1,000.
Bonds can be useful instruments to ensure compliance with legal requirements, contract performance, and in the case of the land development industry, a speedier release of land title to the home buyer.