Highway bonds and inspection fees on a section 38 agreement

A section 38 bond cost is not a fee. It is capital you cannot spend, held against the possibility that you walk away before the estate roads are finished. On a 120 unit scheme the bond, the technical approval fee, the inspection fee and the commuted sums together form a line in the appraisal that is frequently underestimated at land bid stage and painfully precise by the time the agreement is engrossed.

The figures are published. Every highway authority sets out its charging basis for section 38 and section 278 work, and the numbers change annually. Take them from the authority you are dealing with rather than from the last scheme you did in a different county.

What a section 38 agreement commits you to

Section 38 of the Highways Act 1980 lets a highway authority agree to adopt a street as highway maintainable at public expense. You build the roads, footways, drainage, lighting and verges to the authority's design specification, the authority inspects as you go, and after a maintenance period it adopts.

The agreement is a deed and it binds you to four things: constructing to the approved design, securing the works financially, paying the authority's technical approval and inspection charges, and maintaining the street until adoption. It is separate from the planning permission, although a condition or a section 106 obligation will usually require it to be entered into before occupation.

Three points of sequencing that save money:

1. Get technical approval of the design before you fix the groundworks package, because a late change to road geometry or drainage falls on you at the worst time.
2. Enter into the agreement early enough that the advance payments code position is resolved before you build, for the reasons set out below.
3. Agree the phasing of the bond and the adoption in the deed itself, so you are not holding security over completed phases.

How the bond is calculated and released

The bond secures the cost of completing the works if you default. Authorities calculate it from the approved estimate of the highway works, with an allowance for the authority's own costs of stepping in and for cost inflation over the likely period. The basis is published, so ask for the calculation rather than accepting a figure.

Two forms are usual. A surety bond from a bank or an insurer, which carries an annual premium and sits against your facilities. Or a cash deposit, which ties up capital directly and earns little. Which is better depends on your funding structure rather than on any general rule, and the authority will usually accept either from a covenant it considers adequate.

Release normally happens in two stages. A substantial reduction when the works are provisionally certified as complete to the authority's satisfaction, and the balance released at final certification and adoption. Some authorities reduce the bond in phases as sections of road are provisionally certified, which is worth negotiating on a long build programme.

Ask one question of every authority before you budget: does the inspection fee cover re-inspection after a failed test. Where it does not, repeated failures become a variable cost.

Inspection and supervision fees

These cover checking the design submission, auditing the road safety and drainage design, attending site, witnessing tests and issuing certificates. They are charged as a percentage of the estimated works cost under the authority's published schedule, and the percentage usually steps down as the value rises.

The figure is based on your estimate, which creates an obvious temptation and an obvious trap. An understated estimate reduces the fee and the bond at the start, then produces a recalculation when the actual costs emerge, often alongside a less cooperative inspector. Estimate honestly, including drainage, lighting, signing, lining, street trees and the tie-in works.

Where the scheme also needs alterations to the existing highway, those sit under a separate section 278 agreement with its own fees and bond. The two are frequently conflated in appraisals, and our note on section 278 and section 38 highway costs sets out the division.

Commuted sums for structures and unusual materials

A commuted sum is a capital payment that funds the future maintenance of something the authority would rather not inherit without compensation. The items that attract one are predictable: bridges, culverts, retaining walls, pumping stations, sustainable drainage features such as swales and permeable paving, non-standard surfacing like block paving or resin bound gravel, street trees, and bespoke lighting columns.

Calculation is on a whole life basis over a long design period, which is why the sums for structures are large relative to the construction cost. A retaining wall with a 120 year design life generates a very different sum from a stretch of standard kerb.

Two design decisions reduce the exposure materially. Keep the adoptable extent to standard details wherever the layout allows, and put non-standard surfacing in areas that will remain private. And consider whether drainage features can be vested in a water company under a section 104 agreement or retained in private management, rather than offered to the highway authority with a commuted sum attached.

An illustrative example. A scheme of 140 dwellings with 620 metres of adoptable road, one retaining wall of 2.4 metres maximum height in the adoptable extent, block paved shared surfaces to a mews court, and 38 street trees in the verge. Redesigning so the mews court and 22 of the trees sit in private management, and the wall falls outside the adoptable boundary, removes three separate commuted sum heads. This example is illustrative and the sums depend entirely on the authority's published rates.

The maintenance period and its cost

After provisional certification you remain responsible for maintaining the street for a stated period, commonly twelve months, before the authority issues the final certificate and adopts. During that period you carry the cost of repairs, drainage clearance, gully emptying, sweeping, winter maintenance on some authorities' terms, and the replacement of any failed planting.

Budget it as an operational cost rather than a contingency. The items that actually arise are settlement at trench reinstatements, failed ironwork, damaged kerbs from construction traffic on later phases, and dead trees. The last of those is the most avoidable: street trees planted into poor subgrade in a dry summer fail at a rate that surprises people, and the replacement obligation is usually absolute.

Keep the construction traffic off the finished surface for as long as the programme allows, and if you cannot, record the condition before later phases begin.

Private streets, the advance payments code and the later bill

Not entering a section 38 agreement looks like it avoids the bond, and in a narrow sense it does. The advance payments code in sections 219 to 225 of the Highways Act 1980 then applies: before erecting a building on land fronting a private street, the developer must pay a sum to the street works authority or provide security, unless an exemption applies. Having a section 38 agreement in place is one of the exemptions. So the choice is often between a bond under a deed you negotiated and a payment under a statutory code you did not.

Where the street does remain private, the cost moves to the purchasers through an estate management company: a service charge covering resurfacing, lighting electricity and repairs, with a sinking fund that is almost always underfunded at the outset. That has two commercial consequences. Some lenders scrutinise estate charges, and some buyers price them in. It also leaves a reputational tail on the scheme that outlasts the sales period.

Decide deliberately rather than by default, and model both routes over the whole development period.

Provisioning the bond in the appraisal

Four lines, in the order they fall due:

• Technical approval and inspection fees, from the authority's current published schedule, applied to an honest works estimate.
• Bond or deposit, with the surety premium shown as a cost per year across the expected period to provisional certification rather than as a single figure.
• Commuted sums, itemised by element, with a note of which elements could be designed out.
• Maintenance period costs, with a separate allowance for planting replacement.

Then add the one thing appraisals usually omit: the finance cost of capital locked up in a cash deposit or of bond capacity consumed within your facilities. On a scheme with a long build programme that cost exceeds the fees.

Highway matters also drive the evidence base at application stage, and a Transport Assessment is a report type where councils expect a suitably qualified author. Obligation costs run alongside, as covered in section 106 costs beyond the contribution, and where a planning performance agreement is in place the authority's charges are set out in it, as described in planning performance agreements: what you are paying for.

This is general guidance, not legal advice; check the position with your local planning authority or a qualified professional before relying on it. For the document side of the budget, PlanScope pricing is one free report, £50 per report, or £150 per month on the Professional tier.

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