Learn more about contractor bonding capacity

Updated Jun 22, 2020

Shutterstock 1150690232Contractor bonding capacity is an important part of operating in contracting. When you have a project you need to complete, your bonding capacity determines whether or not you can get the bond and actually do the project. As you work to grow your business, increasing your capacity means you can take on new and bigger projects. Knowing how that happens can help you work more effectively toward your business goals and objectives. Here’s what you need to know if you want to increase your bonding capacity.

What is contractor bonding capacity?guest-post-attribution-box

Contractor bonding capacity refers to the maximum amount of surety an organization will give a contractor. There are a number of factors that surety companies used to determine the bonding capacity.

The profitability of the organization. If your organization isn’t profitable, the surety company may decide that it’s too risky to work with you. Showing that your organization is profitable gives the surety company some assurances that you can handle the work to meet the bonding capacity.

The financial solvency of the organization. Along with profitability, you need to show that you pay your bills on time and are managing your debts and other financial factors appropriately. Regardless of profitability, it’s important for your business to be managing its finances properly. Surety companies will also look at your company’s net worth, cash flow, and working capital as financial factors when determining bonding capacity. 

Billing practices and records. The surety company will also analyze your billing practices and records, such as underbilling and overbilling. This part of the analysis fits into determining the financial solvency of the organization as well as how your company operates. Typically, billing practices are examined in context with projects in progress to determine if under- or overbilling is occurring.

Experience in the project type. A contractor’s experience, including in specific project types, is another factor in bonding capacity. If you have completed similar jobs in the past, the surety company knows that your organization can handle this type of project again. However, if this is a new type of project, a surety company may be uncertain about the outcome.

Increasing contractor bonding capacity

Increasing bonding capacity is a good way to increase what you can accomplish as a contractor. However, with so many factors contributing to bonding capacity, it can be difficult to know what an organization can do to help. Here are some things you can do that will help change the way surety companies evaluate your organization.

Examine your cash flow. Along with having some capital for your organization, look at the way your organization handles expenses and income. Your financial records play a major role in bonding capacity, so this is one area you can work on to increase your bonding capacity. Make sure you pay your bills on time and handle your money wisely for the success of your organization.

Think about how profits are used. The best way to spend your profits is to reinvest them into your organization. Instead of using profits to buy new equipment, consider renting. This can save your organization money and leave you with money that you can put back into the business.

Look at the projects you take on. Developing expertise in a particular area can be highly beneficial not only to establish you as an expert in that area but for bonding capacity, as well. If you don’t have experience in a particular project area, surety companies may be reluctant to work with you. Instead, focus on what you do best and showcase how well you do it.

Work with a professional. Working with a CPA is a good way to get a strong evaluation of your financial records, including how your operating processes contribute to the way your financials look. A CPA can give advice about how to improve your financials to increase your bonding capacity.

Whether you want to increase your bonding capacity for a particular project or to help grow your business, you don’t have to rely on a surety company to tell you when you can do it. Instead, you can take an active role in increasing your capacity. Increasing your capacity means you’ll be in a better position to achieve your business goals and objectives no matter what they are.

EDITOR’S NOTE: This article was written by Mike D. Lapre. Lapre established a Surety & Specialty Commercial Lines Insurance Agency known as Lapre Insurance & Surety, in 1984.  Now with NFP, Lapre oversees the bonding department. NFP operates nationally and represents many of the nation’s top insurance carriers.

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