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🔐 Construction Bonding Guide

Bonding is your ticket to larger projects. This guide covers how bonds work, how to get bonded, and how to increase your bonding capacity.

Key Principle

Your bonding capacity is based on trust. Sureties bet on your ability to complete work. Build that trust over time.

Types of Construction Bonds​

Bid Bond​

  • Guarantees you'll honor your bid if selected
  • Usually 5-10% of bid amount
  • Ensures you'll provide performance/payment bonds
  • Forfeited if you withdraw after bid opening

Performance Bond​

  • Guarantees you'll complete the contract
  • Usually 100% of contract value
  • Protects owner if you default
  • Surety may complete work or pay owner

Payment Bond​

  • Guarantees you'll pay subs and suppliers
  • Usually 100% of contract value
  • Required on public projects (Miller Act)
  • Allows subs/suppliers to make claims

Maintenance Bond​

  • Guarantees work for a period after completion
  • Usually 1-2 years
  • Covers defects in workmanship or materials
  • Sometimes called warranty bond

How Bonding Works​

The Three-Party Agreement​

  1. Principal (You) - The contractor getting bonded
  2. Obligee (Owner) - Who the bond protects
  3. Surety - The insurance company backing the bond

If Things Go Wrong​

When you can't perform:

  1. Surety investigates the situation
  2. Surety may provide financing to help you finish
  3. Surety may hire another contractor to complete
  4. Surety may pay the owner directly

Important: You must repay the surety for any losses. Bonds are not insurance—they're a guarantee backed by your assets.

Getting Bonded​

What Sureties Evaluate (The 3 C's)​

1. Character

  • Your reputation and track record
  • Personal credit history
  • References from owners, subs, suppliers
  • History of claims or defaults

2. Capacity

  • Experience with similar project types
  • Organizational capabilities
  • Key personnel qualifications
  • Equipment and resources

3. Capital

  • Financial statements (CPA-prepared)
  • Working capital
  • Net worth
  • Bank relationships

Minimum Requirements (Typical)​

To get bonded, you generally need:

  • 3+ years in business
  • Profitable track record
  • Working capital = 10% of desired bond
  • Net worth = 10% of desired bond
  • Clean personal credit
  • CPA-reviewed or audited financials

The Application Process​

  1. Find a bond producer (agent/broker)
  2. Complete application with financials
  3. Provide supporting documents:
    • Financial statements (2-3 years)
    • Work-in-progress schedule
    • Personal financial statements
    • Bank reference letter
    • Resume of key personnel
    • List of completed projects
  4. Surety underwrites your account
  5. Receive bonding line and rate

Bonding Capacity​

How It's Calculated​

Single Job Limit - Largest single project you can bond Aggregate Limit - Total bonded work at one time

Typical formulas:

  • Single = 10x working capital (varies by surety)
  • Aggregate = 15-20x working capital

Example:​

Working Capital: $500,000

  • Single Job Limit: ~$5,000,000
  • Aggregate Limit: ~$7,500,000

Increasing Your Capacity​

Short-term:

  • Reduce underbillings (increase WIP)
  • Collect receivables faster
  • Pay down debt

Long-term:

  • Retain profits (don't distribute everything)
  • Build net worth over time
  • Establish track record on larger jobs
  • Develop relationships with sureties

Bond Costs​

Premium Rates​

Typical rates: 1-3% of contract value

Factors affecting rate:

  • Your experience and financials
  • Project type and risk
  • Contract terms
  • Competition among sureties

Example:​

$1,000,000 project at 2%:

  • Performance bond: $10,000
  • Payment bond: $10,000
  • Total cost: $20,000

Reducing Bond Costs​

  1. Shop multiple sureties through your broker
  2. Build a track record - rates drop with experience
  3. Improve financials - better ratios = better rates
  4. Maintain relationships - loyalty can help pricing
  5. Complete projects well - no claims = lower rates

Working with Your Surety​

What They Want to See​

Quarterly:

  • Work-in-progress reports
  • Accounts receivable aging
  • Backlog report

Annually:

  • CPA-prepared financial statements
  • Personal financial statements
  • Updated equipment list
  • Organizational chart

Red Flags for Sureties​

  • Declining working capital
  • Overdue receivables
  • Job losses or fade
  • Owner disputes
  • Subcontractor complaints
  • Rapid growth without capital

Maintaining Trust​

  1. Communicate proactively about problems
  2. Submit financials on time
  3. Don't surprise them with bad news
  4. Pay sub and suppliers promptly
  5. Complete jobs profitably

Common Bonding Problems​

"I can't get bonded"​

Solutions:

  • Start with smaller bonds to build track record
  • Improve financial statements
  • Consider SBA bond guarantee program
  • Find a surety specializing in newer contractors

"My capacity is too low"​

Solutions:

  • Partner with bonded contractor on larger jobs
  • Joint venture to share bonding
  • Reduce work-in-progress to free up capacity
  • Grow capital through retained earnings

"My rate is too high"​

Solutions:

  • Shop your account to other sureties
  • Improve your financial ratios
  • Complete current work profitably
  • Reduce risk profile (avoid problem projects)

SBA Surety Bond Guarantee Program​

For contractors who can't get bonded conventionally:

  • SBA guarantees 80-90% of surety's loss
  • Bonds up to $6.5 million per project
  • $10 million aggregate
  • Faster approval through certified sureties

Who qualifies:

  • Small businesses meeting SBA size standards
  • Can't obtain bonding on reasonable terms
  • Have necessary skills and experience