Guide
Getting bonded: what a surety actually looks at
Bonding capacity is decided by your balance sheet, not by how good your work is.
Reviewed by Darren Lim, US CPALicence CPA.742536028 min read
A surety bond is not insurance. Insurance protects you when something goes wrong; a bond protects the project owner if you fail to perform, and the surety expects to be paid back if they have to step in.
That single distinction explains everything about how you are assessed. The surety is not pricing risk to absorb it. They are deciding whether you are good for it.
The three Cs
Underwriting comes down to three things, in roughly this order.
Capital. Your balance sheet. Working capital — current assets minus current liabilities — and net worth. This is the one contractors most often undermine without realising, and the one they have most control over.
Capacity. Can you actually do the work? Track record on similar size and type, your crew, your equipment, your backlog.
Character. Reputation, references, credit history, how you have handled trouble before.
You need all three. But capital is where most declines and low limits come from, and it is the one your books directly determine.
Why the balance sheet decides the number
Bonding capacity is generally set as a multiple of working capital and net worth. The exact multiples vary by surety and by the size of job, but the mechanism is consistent: better working capital means a bigger bond, means bigger jobs you can bid.
Which means every bookkeeping error that understates those figures is directly costing you the size of work available to you.
The common ones:
Loan payments expensed in full. The principal portion should reduce the liability. Booked as an expense it overstates costs, understates profit and equity, and leaves debt looking untouched.
Equipment expensed rather than capitalised. A $40,000 machine treated as a cost is $40,000 of assets missing from your balance sheet — assets a surety would have counted.
Draws in expenses. Understates profit and therefore retained earnings.
Receivables not properly stated. Uncollectible amounts still sitting as assets damage credibility; genuine receivables missing understate current assets.
What they will ask for
Expect to provide:
- Financial statements for the last three years. Above modest bond sizes these often need to be CPA-prepared, and larger programmes may require reviewed or audited statements.
- Current interim financials, closed and reconciled to the most recent month.
- A work-in-progress schedule — jobs in hand, contract value, costs to date, billings to date, estimated cost to complete. Sureties read this closely, because it shows whether you are over- or under-billed on live work.
- Business and personal tax returns.
- A bank reference and evidence of a line of credit.
- Personal financial statements from the owners, and usually a personal indemnity agreement.
That last point deserves attention: you will almost certainly be personally guaranteeing the bond. This is not a facility you take casually.
Where contractors trip
Applying without current financials. If the books are months behind, there is nothing to submit and the process stalls before it starts.
Accrual expectations. Bonding often requires accrual-basis statements, particularly percentage-of-completion for longer jobs. If you have always been cash basis, that conversion is work — and it is better started before you need the bond. See cash basis vs accrual.
A weak WIP schedule. Producing one requires job-level cost tracking. Without job costing in place there is no way to build it honestly.
Taking distributions right before applying. Every dollar out reduces equity and working capital, and therefore your capacity.
Building capacity deliberately
Capacity is not fixed. It responds to what your balance sheet shows.
Leave profit in the business rather than distributing all of it. Keep equipment on the books properly. Convert aged receivables into cash. Arrange a line of credit before you need one — sureties like to see it. And close every month so interim statements exist the day they are requested.
None of that is exotic. It is ordinary bookkeeping done consistently, which is exactly why contractors with good books get bigger bonds than contractors doing identical work with bad ones.
Related
- Getting a line of credit as a contractor
- Cash basis vs accrual accounting
- Job costing for contractors
General information about how surety underwriting works, not financial or legal advice. Requirements vary by surety, bond type and jurisdiction.
How we do this
We build this into your books. Starting with a month that costs you nothing.
We keep the balance sheet a surety actually reads — working capital visible, equipment capitalised, loans amortising, draws in equity — and produce interim statements on demand rather than three weeks late.
- Every transaction categorized, accounts reconciled, the month closed
- Reviewed and signed by Darren Lim, US CPA — licence CPA.74253602
- The Two-Day Guarantee: Your first month back in two days, or the next month is free.
Bonding capacity is roughly a multiple of your working capital and equity, so books that understate both are directly costing you the size of job you can bid. One free month shows you what a surety would see. CPA-signed, no card.