By: Jeron Foxx, Surety Specialist
When underwriters are deciding whether to increase a contractor’s surety bond program, they’re ultimately trying to answer one question: Has this contractor shown they can successfully handle more work without increasing the risk of default? They answer this question by evaluating four key areas: financial strength, largest job completed/experience with similar projects, current backlog, and banking relationship.
Financial Strength
Financial strength is usually the first place an underwriter starts. They want to know if the company has the financial resources to support more work. They’ll review the company’s financial statements and look at items like working capital, equity, cash, debt levels, available bank line of credit, and whether the company has been consistently profitable. The quality of the financial statements is another factor. A CPA-reviewed or audited statement carries more weight than an internally prepared one. A contractor does not have to be perfect financially, but they do need to show they can handle a larger workload.
Largest Job Completed / Experience with Similar Projects
One of the strongest indicators of future success is past performance. Underwriters will look at the largest jobs the company has completed and ask questions like: Was the job profitable? Was it finished on time? Were there any claims or major issues? If you’re asking for a bond on a project that’s much larger than anything you’ve completed before, questions are expected. That doesn’t mean it’s impossible to get approved, but we’ll need to explain why you’re ready to make that jump. A steady progression in project size is much easier for an underwriter to become comfortable with.
Current Backlog
A contractor may have strong finances and experience but still be at capacity. That’s why underwriters pay close attention to backlog. They want to know how many projects are in progress, how much work is left to complete, and whether the company has enough people and equipment to finish everything successfully. Taking on more work isn’t always better if it stretches the company too thin.
Banking Relationship
A strong banking relationship gives the surety additional confidence that the contractor can complete the work. Working with a lender that understands the construction industry is even more beneficial. Sureties want to know the contractor has access to liquidity during potential challenges. Construction is a cash-flow business. Contractors often have to pay employees, subcontractors, and suppliers well before they receive payment from the owner. Having a good relationship with a bank and access to a line of credit gives underwriters confidence that the company has another source of liquidity if cash flow gets tight.
When contractors ask what it takes to increase their bonding capacity, the answer is not just one thing. Underwriters look at the entire picture. The more confidence an underwriter has in a contractor’s ability to complete the work successfully, the easier it is for them to support an increase in the contractor’s bonding program.