Bonding capacity

Bonding capacity is the ceiling a surety puts on how much bonded work a contractor can carry. It usually appears as two numbers: a single-project limit and an aggregate, or work program, limit covering every bonded job not yet finished. Say a contractor has a $5 million single and $12 million aggregate program. It can take a $4 million job only if its backlog leaves room under the aggregate.

Underwriters weigh the "three Cs": character, capacity and capital. The file typically includes CPA-prepared reviewed or audited financial statements, a work-in-progress schedule showing backlog and margins, bank credit, personal financial statements and a record of completing similar jobs. Capacity follows working capital and equity more than revenue, so a fast-growing firm often finds its bonding lagging behind the jobs it wants to bid.

Capacity is not a guarantee. The surety reviews it at least yearly, and a loss year, a cash drain or a troubled job can tighten it. Because the surety will want recourse, owners usually sign a general indemnity agreement personally. To grow capacity, retain earnings, keep clean books, share current WIP schedules and meet your surety before you bid something unusually large. The guide on surety bonds explained: how they differ from insurance explains how sureties underwrite, and the bid bond entry covers the first bond in the chain.