Alex Cocklin at RS Bonds Surety looks at the complex contractual issues around transferring responsibility for roads and sewers, explaining why securing the required ‘Bonds’ can be challenging in today’s market.
Road and Sewer Bonds are a contractual requirement when a developer wishes to transfer responsibility of a road or sewer to the council or a water company.
To put it simply, it is an agreement between both the developer and the Government to ensure that all parties are happy and are covered. This is because these surety bonds help to cover the Government or water authorities in the event of developers failing to meet the standards that roads and sewers require.
Due to the current economic climate and the increased number of housebuilder insolvencies, insurers are becoming increasingly risk averse, as they continue to significantly heighten their underwriting criteria. In addition to this reduced appetite within the industry, many housebuilders are nearing capacity limits with their warranty provider, which further adds to the challenge of efficiently obtaining section bonds in today’s market.
These challenges are intensified by a noticeable lack of surety bond brokers operating in the industry, leaving housebuilders with limited guidance and support in securing new road and sewer bond capacity. Owing to our position as the UK’s only road and sewer bond specialist, we leverage our technical expertise to innovate within the market and collaborate with housebuilders, surety providers and adopting parties to alleviate the significant pressures experienced.
Cash bonds vs surety bonds
If, as a business, you are cash-rich and have large amounts of working capital, a cash bond can be a favourable solution. This is because the cash will be returned upon bond cancellation and adoption. However, with the uncertain economic climate, increased insolvencies and increased supplier chain costs, a surety bond is typically the most favourable solution as it alleviates working capital, freeing up cash flow for the project.
They offer a huge amount of financial protection to developers without having to provide a large upfront sum. This leaves the developer with far more capital to work with on the completion
of their project.
In addition to this, surety bonds provide financial protection to all parties involved in a contractual agreement. This helps to put local authorities at ease as they, as well as water companies, are fully covered.
Cash bonds leave the developer with sole responsibility for damages and poor compliance. This means that the government has less protection and may therefore see the developer as more of
a risk.
Aftercare
Recognising the lack of aftercare housebuilders typically experience post-bond procurement, some providers have a dedicated bond management programme. Through this programme, they actively partner with housebuilders, providing key milestone reminders to support and assist in the efficient achievement of adoption and bond cancellation, thereby freeing up headroom for new road and sewer bonds.
Advice for housebuilders
Work closely with your specialist broker to proactively secure capacity for your current and upcoming development pipeline. Explore a guaranteed zero cash collateral policy to avoid tying up and restricting essential working capital.
Manage your live bond portfolio by seeking a tailored bond management programme to efficiently achieve bond cancellation, thus reducing expenditure on bond overrun fees.
Alex Cocklin is head of client relations at RS Bonds Surety