Want More Bonding Capacity? The Key is to Start Before You Need it.
By Charlie Holleman
When’s the worst time to start thinking about more bonding capacity? It’s when you’ve already found the job you want to bid. That’s when the frantic back and forth starts: Can we get the bond? What do you need from us? How fast can we make this happen?
Sometimes the answer is yes. But all too often the surety’s response is, “You’re not quite there yet.”
The problem is that you can’t increase bonding capacity overnight. Sureties are looking at the financial strength of the company, how your current jobs are performing, how much work you’re already carrying, and whether you have the people and resources to take on more.
So, if bigger bonded projects are part of your growth plan, the key is to start building the capacity before the perfect job shows up.
Keep Some Money in the Business
This sounds obvious, but it can be one of the harder conversations bonding agents will have with successful utility contractors.
The company’s had a good year and there’s cash in the bank. The owners want to take distributions.
There’s nothing wrong with that. You built the company to make money.
But if you’re also telling your bonding agent you want to significantly increase your program next year, pulling most of the profit out of the company can work against that goal.
Sureties care a lot about liquidity and working capital—the money available to pay payroll, suppliers, subcontractors and all the other bills that show up before the owner pays you.
Before pulling out a large amount of cash, ask a simple question: What are we trying to bond next year?
Get Serious About Collecting Receivables
A $500,000 receivable looks great on a balance sheet. But a $500,000 receivable that’s 120 days old? Not great.
Sureties won’t give every current asset on your balance sheet equal weight. They’re interested in how much of that working capital is actually available to support the next project.
So, if your accounts receivable report has a growing 90+ day column, start working it down before asking for a bigger bonding program.
Keep in mind this isn’t just an accounting issue; operations may also be involved. Are invoices going out late? Are change orders holding up payment? Is documentation missing? Is one customer consistently stretching you?
Collecting faster can do more for your bonding position than simply showing more revenue.
Make Your WIP Schedule Something You Actually Use
If your Work-In-Progress schedule only gets cleaned up when the CPA asks for it, you’re missing an opportunity.
A good WIP schedule tells you—and your surety—whether jobs are making what you expected them to make, where margins are moving, and if problems are developing in the backlog.
Timely WIP information is one of the top things that can help a surety respond faster to your capacity request, so it’s vital to review it monthly.
If a margin dropped, find out why. If a large underbilling has been sitting for three months, understand what’s behind it. If the project manager says the job is doing great but accounting says otherwise, get everybody in the same room.
The point isn’t to make the WIP schedule look perfect. It’s to demonstrate that management understands what’s going on with each job.
Upgrade Your Financial Reporting Before Someone Makes You
Many utility contractors outgrow their financial reporting without realizing it.
Internally prepared statements may have worked early on. But as revenue doubles, projects grow, and bonding needs change, financial reporting often stays the same.
At higher levels, a surety may ask for CPA-prepared financial statements and may require a compilation, review, or audit depending on the size and risk of the program.
Don’t wait for your bond agent to tell you this three weeks before bid day.
Tell your CPA and surety agent where you want the company to be in the next 12 to 24 months. Ask what level of financial reporting is likely to be expected when you get there.
If you know you’ll eventually need reviewed statements, you can prepare for that process on your schedule rather than somebody else’s.
Build the Bank Relationship While Things Are Going Well
The best time to get a line of credit is when you don’t need one.
This business eats cash. Payroll happens whether the owner paid you or not. Materials have to be bought. Subs have to be paid. Retainage sits out there. A solid bank line gives the company another tool for handling temporary cash-flow pressure.
And if you already have a line, don’t assume the amount you set up five years ago still makes sense today. As the company grows, talk with your banker about where revenue and backlog are headed. Understand your covenants. Know what would be required to increase the line.
Your banker shouldn’t learn about your growth plan for the first time when you need money.
Don’t Grow Faster Than You Can Actually Perform
More bonding capacity isn’t only about the balance sheet. Sureties are also asking whether you have the operational capacity to handle the work.
Say you’ve successfully completed several $5 million jobs and now want to take on a $15 million utility project. The surety isn’t just looking at whether you have enough working capital. They want to know:
- Who’s running the job?
- What other projects will be at peak production at the same time?
- Do you have the crews and the equipment?
- Do you have superintendent and project management depth?
- Are you moving into a type of work you’ve actually done before?
Growth doesn’t automatically mean capacity grows with it. People, equipment, subcontractor relationships, and management systems all have to keep up.
Tell Your Surety Where You’re Going
This may be the easiest step on the list. Talk to your bond producer before you need the bond.
If you’re doing $25 million in revenue today and want to be at $40 million in two years, say so. If you want to move from $5 million projects to $10 million projects, ask what the surety will need to see. It’s easier for an underwriter to support a contractor’s growth when the growth isn’t a surprise.
Build Capacity Before the Opportunity Shows Up
There isn’t one magic calculation that determines how much bonding capacity you should have. Different sureties weigh things differently, and the project itself matters.
But the basic principle is pretty simple: Strong working capital. Good jobs. Reliable financial information. Available credit. Enough people and equipment to perform the work. And a surety team that knows where you’re trying to go.
These things take time to build, so if bigger bonded work is part of the plan, don’t wait until the perfect project hits your desk.
Start building the capacity for it now.
Charlie Holleman, CPA, is Audit Partner at PriceKubecka and a member of CFMA and AGC. He works closely with contractors on financial reporting, WIP discipline, and accounting processes that can affect bonding capacity and banking relationships. PriceKubecka is a Texas-based CPA firm with 30 years of experience serving general contractors, utility contractors, specialty contractors, and architecture and engineering firms across the country.
