Bonding capacity is one of the few things that can cap a contractor’s growth regardless of how well the work goes. A surety’s decision is driven largely by the financial information the contractor provides — and by how that information is put together.
This article covers what underwriters generally look at, why the working capital on your balance sheet is not the working capital they use, and what can be organized before a renewal.
Corey Roder, CPA PLLC does not itself perform audits, reviews, or other assurance engagements. This article is general information, not advice about a specific bonding program.
How bonding capacity is usually expressed
Most surety programs carry two limits:
- Single job limit — the largest individual project the surety will bond
- Aggregate limit — the maximum total bonded work outstanding at any time
A program described as $5 million single / $25 million aggregate means individual jobs up to $5 million are generally pre-approved, provided total bonded backlog stays within the aggregate.
Capacity is commonly discussed as a multiple of a contractor’s financial capacity — typically working capital, net worth, or both. The multiples themselves are not published by any surety industry body and are not standards. They vary by carrier, trade, region, program, and market conditions, and the same contractor can be evaluated differently by two sureties in the same week.
Ask rather than assume. Multiplier ranges circulate widely in agency and firm marketing, but they are not standards. Ask your surety agent or underwriter how your specific program is evaluated — how your capacity is calculated, and which balance sheet items they adjust. That is the only reliable answer for your business.
The three Cs
Surety underwriting is conventionally organized around character, capacity, and capital.[1]
Capital — working capital, net worth, profitability, liquidity, and debt levels.
Capacity — demonstrated ability to perform work of the size, type, and complexity being requested: completed project history, current workload, depth of management, subcontractor relationships, and equipment. Note this is operational capacity, which is a different thing from bonding capacity.
Character — credit history, claims history, references, and how transparently the contractor communicates with the surety. Character is not a soft factor. An underwriter who learns something material from a third party rather than from the contractor will price that in.
The working capital on your balance sheet is not the working capital they use
This is the single most useful thing for a contractor to understand, and it is where most surprises come from.
Sureties generally do not take reported working capital at face value. They commonly apply discounts to arrive at an adjusted or underwriting working capital figure. Items that are often discounted or disallowed include:
- Receivables and advances from related parties or owners — often heavily discounted or excluded entirely
- Prepaid expenses such as insurance and rent
- Inventory — commonly discounted
- Underbillings — frequently discounted, because they may reflect estimated gross profit that has not yet been demonstrated
- Trade receivables aged beyond a stated threshold, commonly around 90 days
How far each item is adjusted, and which items are adjusted at all, varies by carrier, trade, region, program, and circumstances. There is no universal schedule of discounts, and a contractor should not assume that another company’s experience predicts their own.
The practical consequence is what matters: a contractor can look adequately capitalized on the balance sheet and still be viewed as thin by an underwriter, entirely because of what sits inside current assets. Net worth is often adjusted on a similar basis.
Other measures underwriters commonly run include the current ratio, debt-to-equity, backlog relative to equity, and the trend in working capital over several periods. Trend often matters more than any single figure.
Why the WIP schedule matters more than the balance sheet
The balance sheet describes a moment that has already passed. The work-in-progress schedule describes what is still to come, which is what the surety is actually underwriting.
Underwriters generally use it to assess:
Cost to complete. Capacity is driven by remaining cost to complete, not by total contract value. As work is completed, capacity is released; as new contracts are added, it is consumed.
Profit fade. Comparing estimated gross profit at bid to current estimated gross profit, job by job and period over period. See Construction Profit Fade.
Underbillings. Persistent or late-stage underbilling can be a significant underwriting concern. It can reflect unapproved change orders, costs running ahead of the estimate, or billing that has fallen behind the work.
Overbillings. Moderate overbilling is normal and expected in construction. Overbilling substantially in excess of the estimated gross profit on a job is a different matter — it means the job is being financed by cash that will have to be earned later.
Whether cost-to-complete is being managed. A schedule where estimated cost has not moved from the original bid on any job tells an underwriter that no one is re-estimating.
For how the schedule is built and what the columns mean, see The WIP Schedule for Contractors.
What level of financial statement a surety asks for
Sureties generally expect the level of CPA involvement to increase as a program grows. Smaller programs may be written on an application and credit review. As programs grow, sureties typically want CPA-involved financial statements, and for mid-size and larger programs a review or audit is common.
Be careful with thresholds. Specific dollar cutoffs circulate widely in agency and firm marketing, but no surety industry body publishes them, and they vary by carrier. Ask your surety agent what your program requires rather than relying on a general rule.
Sureties commonly expect contractor financial statements and WIP reporting that reflect over-time revenue recognition where the applicable contracts meet ASC 606’s criteria, often using a cost-to-cost measure of progress. In industry practice this is still frequently described as percentage-of-completion reporting. A contractor presenting cash- or tax-basis statements is at a structural disadvantage regardless of how the business is performing.
The terminology is worth getting right, because when a surety names a level it is naming a specific type of engagement performed under professional standards:[2][3]
| What a surety may ask for | Assurance provided | Report issued |
|---|---|---|
| Preparation | None | No report; each page carries a statement that no assurance is provided |
| Compilation | None | Compilation report |
| Review | Limited assurance | Review report |
| Audit | Reasonable assurance | Auditor’s report |
“CPA-prepared” is often used loosely to mean “came from a CPA.” Under professional standards these are four different engagements. If a surety asks for a particular level, ask your agent exactly which one, because the answer determines who you need to engage and what it will cost.
Where this firm fits. The table above describes engagement types a surety may request. It is not a description of this firm’s services. Corey Roder, CPA PLLC does not offer compilation engagements, and does not itself perform audits, reviews, or other assurance engagements. Need an audit, review, or other assurance engagement? We can help coordinate it. Corey Roder, CPA PLLC maintains referral relationships with independent CPA firms that provide these services. The assurance engagement is separately contracted with and performed by the independent CPA firm. Corey Roder, CPA PLLC can provide accounting records and schedules within the scope of its engagement.
Common reasons capacity gets reduced
- Repeated profit fade across multiple jobs, or one large fade the contractor cannot explain
- Chronic or late-stage underbillings
- Overbilling well beyond the estimated profit on a job
- A declining working capital trend, or equity thinned by distributions
- Debt or backlog growing faster than equity
- Taking work outside demonstrated capacity — larger, a different trade, a new geography, an unfamiliar owner type
- Credit issues, liens, tax liens, or claims history
- Late or incomplete submissions, or figures that do not reconcile between the financial statements and the tax return
- Loss of key personnel with no continuity plan
Note how many of these are about information quality and communication rather than financial performance. The inability to explain a fade is itself a finding.
What can be organized before renewal
- Submit year-end statements reasonably promptly after year end, with current interim statements and a current WIP schedule if you are seeking an increase
- Work trade receivables down; aged receivables commonly get discounted
- Reconcile the WIP schedule to the general ledger and to the tax return before it goes out
- Have a written explanation ready for every job showing fade, every significant underbilling, and every job above 90 percent complete still carrying meaningful cost to complete
- Ask which balance sheet items your surety adjusts, and what your adjusted figure looks like
- Bring problems to the surety early and directly
- Share the pipeline and the growth plan
Several of these are accounting-records questions rather than financial-performance questions, which is usually the fastest thing to improve.
Where this connects to the accounting
Most of what a surety evaluates traces back to whether job cost data is captured accurately and whether cost-to-complete is genuinely re-estimated each period. A WIP schedule assembled once a year from incomplete job costs will not support a growing bonding program.
Construction & Contractor Accounting · Fractional Controller · Fractional CFO
If your bonding capacity is constraining what you can bid, start a conversation.
References
- Surety & Fidelity Association of America; Construction Financial Management Association — character, capacity, and capital as the conventional underwriting framework
- AICPA, AR-C Section 70, Preparation of Financial Statements
- AICPA, AR-C Section 80, Compilation Engagements
Corey Roder, CPA is the founder of Corey Roder, CPA PLLC. He is a licensed CPA who founded a construction company and served as its COO and CFO, managing the financial and operational decisions of that business. Earlier in his career he worked as an auditor at Grant Thornton. More about the firm: Company & People.
Corey Roder, CPA PLLC does not itself perform audits, reviews, or other assurance engagements. Corey Roder, CPA PLLC also does not offer compilation engagements. Need an audit, review, or other assurance engagement? We can help coordinate it. Corey Roder, CPA PLLC maintains referral relationships with independent CPA firms that provide these services. The assurance engagement is separately contracted with and performed by the independent CPA firm.