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6 Ways to Increase Your Contract Bond Capacity

March 27, 2020

Trust. In business, as in life, you’re sunk without it.

That’s just as true in the surety world as it might be elsewhere. Any general contractor or subcontractor hoping to grow their business and land larger projects won’t get far without the trust of a bond underwriter.

How do you go about establishing that trust? What can a GC or sub do to not only ensure they get the bonding they need, but to increase their contract bond capacity?

Before we dive into answering all of that, it probably wouldn’t hurt to quickly review the types of construction bonds out there:

  • Bid bonds guarantee you will sign the contract and provide performance and payment bonds if you are awarded the project.
  • Performance bonds guarantee your work to the owner. The required “performance” of your work is outlined in writing in the contract.
  • Payment bonds guarantee that you’ll pay all sub-contractors, workers and suppliers.
  • Maintenance bonds provide a warranty on your work for a specific amount of time after the job is done.

Your contract bond capacity, by the way, is the pre-approved dollar amount of contract bonds that you qualify for. Your “single limit” is the largest bond you can get for a single job. Your “aggregate limit” is the total amount of bonded work on hand you can have at once for several projects.

What follows are the six things you’ll want to make sure you address to increase your contract bond capacity, aka a surety’s trust in you and your business.

1. Make sure your financials are strong. Your bank and tax statements will be reviewed to help the surety to determine how well you handle money. What’s your working capital look like? How’s cash flow? Are you staying on top of receivables? Are you profitable? All of those questions will be on the surety’s list. By the way, surety companies like to see liquid assets or working capital equal to at least 7-10% of the remaining cost to complete backlog for subcontractors and no less than 5% for GCs.

2. Make sure your cost estimates are reliably accurate. Regularly update estimates and avoid big swings in profit because those will be viewed as volatility – a negative for sureties.

3. Get to know your surety underwriter. If you already have a relationship with a surety, work on improving it. Face-to-face meetings on a regular basis should be part of your game plan. That includes showing off your work to your surety. Invite them to the jobsite. Show your process and planning in the field and your safety and control measures. Let the surety see what you’ve built.

4. Make sure your team is top-notch. Accounting staff and systems will be the first to be reviewed as their work product (the financial reports) is likely to be seen before the underwriter meets anyone at your company. Accurate and detailed financial information on a timely basis is a must. Not incidentally, don’t try to save money and do things internally. Accounting in the construction sector requires specialized expertise and attention.

5. Get your bank to boost your line of credit. A larger line shows that you’re credit-worthy and that you have the ability to pay losses. Oh, and do everything in your power to rarely, if ever, use the line.

6. This will sound self-serving, but make sure you’re working with the right surety broker. The one you want is a professional who will advocate on your behalf. They’re someone who should know your business inside and out and will offer plenty of ongoing, proactive advice on how to improve your contract bond capacity.

CCIG is a Denver-area insurance and bond brokerage with the full-service capabilities of a national brokerage. We do more than make sure you have the right policy. We also help you manage your long-term cost of insurance with our risk and claims management expertise and a commitment to service excellence.

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