Contractors will likely need various surety bonds to start and complete construction projects. These bonds may be required by the government or the project owner to protect the service recipient financially, ensuring the project they’re funding is completed as promised.
As a contractor, it’s important to understand what bonding capacity is, the factors that impact it, and how you can be intentional about increasing it over time.
What is bonding capacity?
Bonding capacity is the financial limit a surety company will provide to a contractor for a particular type of project. The amount of bonding capacity a contractor is granted will depend on several factors, including:
- The contractor’s financial history
- The contractor’s experience, including technical and managerial ability
- Their credit history
- The size and type of project
The bonding capacity – how much the surety is willing to cover for the contractor – is ultimately based on the risk involved.
Why is bonding capacity important?
Having a greater bonding capacity can help your company grow, allowing you to take more jobs that come your way. Here are some other reasons bonding capacity matters.
It allows contractors to bid on larger and more complex projects.
A contractor with a high bonding capacity is more likely to be considered for larger and more complex projects. Surety companies are more likely to issue bonds for larger projects, and project owners are more likely to require bonds for larger projects.
It helps protect clients.
Surety bonds also help protect clients by ensuring that the contractor will complete the project according to the contract terms. The surety company will be liable if the contractor fails to complete the project. Then the surety will require reimbursement from the contractor for any costs they covered.
It can help resolve disputes.
If there is a dispute between the contractor and the client, the surety company can be involved in the dispute resolution process. This can help to ensure that the dispute is resolved fairly and that the client’s interests are protected.
What determines bonding capacity?
We’ve already touched on this in the first section, but here’s a deeper dive into the factors that impact bonding capacity.
- Financial history: Surety companies will look at the contractor’s financial history to see if they’ve paid their debts on time and met their financial obligations.
- Experience: Surety companies will also look at the contractor’s experience to see if they have a history of completing projects on time and within budget.
- Project type: A surety company may be more willing to provide a bond for a contractor with a proven track record of completing commercial projects than for a contractor with a proven track record of completing residential projects.
- Project size: Surety companies will typically be more willing to provide a bond for a smaller project than a larger one.
- Working capital: Working capital is the amount of money a contractor has available for day-to-day operations. This can tell a surety whether a contractor has enough money to cover unexpected expenses that may arise during a project.
- Equity: Equity is the amount of money that a contractor owns in their business. Surety companies will determine if a contractor has sufficient assets to cover financial obligations if they, for some reason, can’t complete a project.
How can I increase my company’s bonding capacity?
If a contractor wants to increase their bonding capacity, they can improve their financial history, increase their experience, and bid on smaller and less complex projects. They can also partner with a surety company that specializes in working with contractors.
Here are some pro tips:
- Complete projects on time.
- Pay subcontractors on time.
- Upgrade your financial presentation by having a third-party CPA prepare your statements on a percentage of completion accounting method.
- Work with the right surety company – one that understands your company’s vision and can help you fulfill it.
- Be transparent with your surety company.
- Have a strong business plan.
- Be patient.
Types of Bonds Subject to Bonding Capacity
The following bonds are typically subject to bonding capacity:
- Bid bonds: These bonds are required by the project owner to ensure that the contractor will submit a bid that is financially feasible.
- Performance bonds: These bonds guarantee that the contractor will complete the project according to the contract terms.
- Payment bonds: These bonds guarantee that the contractor will pay its subcontractors and suppliers for the work they do on the project.
Contact ZipBonds to Learn More
ZipBonds offers the fastest and most secure option for getting the surety bonds you need. Our all-digital platform is intuitive and straightforward. Feel free to reach out with any questions or guidance on increasing your bonding capacity. You can email us at firstname.lastname@example.org, message us on Live Chat, or call 888-435-4191.