If you’re a contractor who wants to bid on public jobs, large private projects, or anything over a few hundred thousand dollars, you need surety bonds. A surety bond is not insurance; it’s a three-party promise that says, “We (the surety) believe this contractor will perform the job and pay all bills. If they don’t, we’ll cover it.”
When your file hits the surety underwriter’s table, the underwriter doesn’t start with your resume or your project list; they open the financial statements and start circling numbers in red. Here are the ten items that decide whether you get a $5 million single job limit or a $50 million program, and more importantly, whether your bond rate is 0.6% or 2.5%.
1. True Working Capital – Not the Number You Hope For
Most contractors quote the working capital line straight off the balance sheet. Underwriters don’t. They adjust:
- Subtract related-party receivables
- Haircut stale or disputed receivables
- Remove underbillings on problem jobs
- Add back non-current portion of debt
- Add back stock inventory that isn’t turning
- Positive adjust for any related party payables that the company could leverage into longer payment terms if absolu
The number that survives these adjustments is what they call “adjusted working capital.” That adjusted number is what sets your capacity. Owners can lose 30–40% of reported working capital in one meeting because of these adjustments.
2. Current Ratio After Adjustments
Sureties live by 1.5:1 or better. If you’re at 1.3:1 after the adjustments above, expect a letter requiring you to inject cash or pay down debt before they’ll increase limits.
3. Equity Trends – The Single Biggest Driver of Long-Term Capacity
Underwriters plot your tangible net worth for the last five years on a graph. A steady upward line gets you 15–20× net worth in total program capacity. Flat or declining equity caps you at 8–10×, no matter how profitable last year was.
Underwriters will adjust for:
- Goodwill
- Advances to related parties
- Addback payables to related parties and owners if they will subordinate
- Internal financials – normally going to get a contractor up to a $2 million program
- Compiled financials – normally going to get a bonding program of $3 million. But if it is a quality compilation with WIP and Closed Contract supplemental schedule, a bigger bonding program may be able to be underwritten
- Reviewed financials – a contractor can generally get whatever program is needed.
- Audited financials – only really needed if there are mega bonding programs needed with a contractor who self-performs a lot of the work or there is complex corporate structure or lot of corporate divisions involved.
4. Gross Profit Fade Analysis
They pull every completed job from your WIP schedule for the last 24–36 months and calculate original gross profit % vs. final gross profit %. More than 1–2 points of aggregate fade triggers deep questions about estimating, change-order practices, and PM accountability.
5. Cash Flow from Operations
Profit is nice; cash is mandatory. Negative cash flow from operations in two of the last three years is an almost automatic decline for larger programs. They don’t care that you bought a new office building; cash tied up in fixed assets doesn’t pay subcontractors.
6. Underbillings Concentration
One job with underbillings > 25% of total equity gets its own page in the underwriting file. Underwriters assume that job is in trouble until proven otherwise. Multiple jobs like that will freeze your bonding line until they’re billed or closed out profitably.
7. Overhead Trend vs. Volume
If your volume doubled but your G&A only went up 10%, you look like a hero. If volume is flat and overhead is up 25%, you look reckless. They are brutal on overhead creep.
8. Bank and Lender Relationships
A clean bank line with 20–30% availability and no covenant defaults is worth its weight in gold. Multiple banks, high-interest merchant cash advances, or factoring receivables are instant red flags.
Surety underwriters also look at personal credit scores. A majority of surety’s want to see scores of at least 700 no matter how much bonding you are looking for.
Both personal credit and business credit needs to be free of bankruptcies, frequent late pays, judgements and tax liens.
9. Contingent Liabilities and Off-Balance-Sheet Exposure
Pending claims, disputed change orders, open litigation, and personal guarantees on equipment or real estate all get quantified and stressed. I’ve seen $800k of “we think we’ll win” litigation knock $4–5 million off an available bonding program.
10. CPA Opinion and Work-in-Progress Schedule Quality
Bonding programs are limited based on the level of assurance on the financial statements. As a general rule of thumb, the following bonding program capacities exist but deviations happen if other reasons like the quality of management and historical performance can be brought up:
The Real-World Capacity Formula Most Sureties Use Today:
Single Job Limit ≈ 8–12 × Adjusted Working Capital
Aggregate Program Limit ≈ 12–20 × Tangible Net Worth
(With the lower multiples applied when any of the ten items above are weak.)
What Owners and PMs Can Do Right Now:
1. Run monthly financials and an updated WIP within 20 days of month-end.
2. Keep underbillings on any one job under 20% of equity and be able to explain the larger underbillings in detail.
3. Get disputed or slow-pay receivables off the books or fully reserved.
4. Always maintain at least 25–30% availability on your bank line.
5. Have your CPA issue compiled or reviewed statements every year; upgrade to an audit once you cross $100 million in revenue.
6. Build cash, not just profit. Retain 50–70% of annual earnings inside the company for the next three years if you want to double your bonding capacity.
Surety underwriting isn’t personal; it’s arithmetic. The numbers either support the story you’re telling or they don’t. Control the ten items above and you control your bonding future. Ignore them and no amount of golf outings or past favors will get you the bonds you need for the jobs you want.
