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Surety Glossary: 67 Bonding Terms in Plain Language

Surety has its own vocabulary, and most of it gets used at you rather than explained to you. This page defines the terms you will actually hear from a producer, an underwriter, or an owner's contract administrator.

Each entry is written for a contractor, not for a broker. Where a term has a real consequence for your money or your capacity, there is a line telling you what that consequence is.

Start with how surety bonds actually work if you are new to this. Come back here when someone uses a word you did not catch.

A​

Admitted surety​

A surety company licensed by a state's insurance department to write bonds in that state. Most public agencies and many private owners require an admitted surety, and some also require a minimum A.M. Best rating or a T-listing.

Why it matters to you. If your surety is not admitted in the state where the job sits, the obligee can reject your bond even though the paper is otherwise perfect.

Aggregate limit​

The total amount of uncompleted bonded work your surety will let you carry at one time. It appears in your letter of authority alongside the single job limit.

Aggregate is measured in cost to complete, not contract value. If you hold $8M of bonded contracts and $3M of that work is already built, you are consuming $5M of aggregate.

Why it matters to you. This is the number that stops you bidding, and most contractors overstate their remaining room because they measure it in contract dollars. See bonding capacity explained.

A.M. Best rating​

A financial strength rating published by A.M. Best for insurance and surety companies, on a scale running from A++ down. Bid documents frequently specify a minimum, commonly "A- or better," sometimes with a minimum financial size category.

Why it matters to you. Read the rating requirement out of the bid documents before you request the bond. A surety that is admitted, willing and priced well is still no good if it sits one notch below what the specification demands.

Analyzed net worth​

Your net worth after the surety's adjustments — intangibles and related-party assets removed, formally subordinated debt added back to equity. It is the figure behind the net-worth-to-backlog test, not the equity line on your balance sheet.

Why it matters to you. Subordinating an owner loan moves it from liabilities into analyzed net worth. It costs a signature and changes your debt-to-equity ratio twice over.

Analyzed working capital​

Your working capital after the surety recomputes it: 90-day-plus receivables cut, related-party receivables removed, inventory and prepaids removed, underbillings haircut. This is the single number your capacity is built from.

A contractor showing $1,080,000 of working capital as presented can easily show $150,000 analyzed. Neither party is lying; they are using different numbers.

Why it matters to you. Run your own balance sheet through the adjustments before an underwriter does. How sureties read your financials walks the whole calculation.

As allowed​

The surety's version of your numbers after its adjustments — the recomputed balance sheet that actually drives your bond line. Paired with as given.

Why it matters to you. Every conversation where your producer's numbers do not match yours is an as-given versus as-allowed conversation. Ask which one is being quoted.

As given​

Your financial statements exactly as your CPA prepared them, before any surety adjustment.

Attorney-in-fact​

The person authorized to sign a bond on the surety's behalf under a power of attorney. In practice this is usually your producer, who literally signs for the surety company.

Why it matters to you. A bond that is not signed by an attorney-in-fact, with the power of attorney attached, is not a valid bond. Check both every time.

B​

Backlog​

Work you are under contract to perform but have not yet performed. In surety analysis, backlog means cost to complete — remaining cost, not remaining contract value and not total contract value.

Why it matters to you. Using contract value instead of cost to complete makes your working-capital-to-backlog ratio look far better than it is, right up until the underwriter recalculates it.

Bid bond​

A bond guaranteeing that if you are the low bidder you will sign the contract at your bid price and produce the required final bonds. Usually 10% of the bid amount, sometimes 5% or a fixed dollar figure.

Producers do not normally charge separate premium for bid bonds.

Why it matters to you. If you win and then walk, the obligee can claim the difference between your bid and the next bidder's, up to the penal sum — and you reimburse the surety for it.

Bid security​

The general term for whatever the owner requires with your bid to prove you will stand behind it. A bid bond is the usual form; a certified check, cashier's check or letter of credit may be accepted or required instead.

Why it matters to you. Cash and letters of credit tie up real money or real bank capacity. A bid bond does neither, which is one reason bonding is worth the setup effort.

Bond form​

The actual document text of the bond. It is either the surety's standard form, an industry form such as an AIA document, or a form the owner wrote and attached to the bid package.

Why it matters to you. Owner-supplied forms are the number one cause of late bonds. Send yours to your producer as a PDF during the bid phase, not after you win. See the bond request and issuance process.

Bond number​

The unique identifier assigned to each bond. Sureties issue producers blocks of numbers, commonly twenty at a time, drawn from a pool shared across that producer's clients with that surety.

Why it matters to you. Log every bond number in your bond register at issuance. It is what makes closeout possible a year later, and it is how you reconcile the execution report.

Bond rider​

An amendment attached to an existing bond that changes a term — most often increasing the penal sum after significant change orders, or adding a dual obligee.

Why it matters to you. A rider is not automatic. If change orders have grown the contract materially, ask whether the owner requires a rider, and carry the extra premium in your change order pricing.

C​

Capacity​

The amount of bonded work a surety will support, expressed as a single job limit and an aggregate limit. It is driven mainly by analyzed working capital and analyzed net worth.

Why it matters to you. Capacity is not fixed. It moves with your balance sheet, your track record and your relationship. See bonding capacity explained.

Collateral​

Assets pledged to the surety to support bonds it would not otherwise write — cash, a letter of credit, or a lien on real estate. Common for first-time accounts, for a job over the single limit, or after a problem.

The General Indemnity Agreement typically also lets the surety demand collateral on demand once a claim looks likely.

Why it matters to you. Collateral is expensive because it is dead money. Treat a collateral requirement as a condition to negotiate out of over the next year, not as a permanent state.

Completed contract method​

An accounting method that recognizes all revenue and cost on a job only when the job finishes. The alternative is percentage of completion.

Why it matters to you. Completed-contract statements tell a surety nothing about the jobs currently in progress, which is exactly where the risk sits. They are poor for surety purposes. See financial statements.

A document in which the surety agrees to something the contract requires its consent for — most often final payment, and sometimes release of retainage or an assignment of the contract.

Why it matters to you. Owners frequently will not release final payment without it, so it belongs on your closeout list. See bond closeout and final premium.

Contract bond​

The umbrella term for bonds supporting a construction contract: bid, performance, payment and maintenance bonds. Distinguished from commercial bonds such as license bonds.

Cost to complete​

The remaining cost — not the remaining revenue — to finish the work under a contract. It is the correct measure of backlog and the basis on which your aggregate limit is consumed.

Why it matters to you. Every dollar you build reduces your cost to complete and releases aggregate. Keeping cost-to-complete estimates current is how you free up room to bid the next job.

Cure notice​

A written notice from the owner stating that you are in breach and giving you a period to fix it. On many contracts it is the step before a declaration of default, and the surety is often entitled to a copy.

Why it matters to you. Call your producer the day a cure notice arrives, not the day the cure period expires. A surety with time has options; a surety handed a default notice has one, and it is the expensive one.

D​

Default​

A formal declaration by the owner that you have failed to perform, which triggers the performance bond. The surety then chooses among financing you, tendering a replacement contractor, taking over the work under a takeover agreement, or paying the penal sum.

Why it matters to you. You do not choose which option the surety takes, and afterwards the surety collects everything it spent from you and every indemnitor. See when a bond claim happens.

Dual obligee rider​

A rider naming a second obligee — usually the project lender — so that party can also make a claim on the bond.

Why it matters to you. Lenders on private work ask for these routinely. Flag it in your bond request rather than discovering it at closing, because the surety has to approve the wording.

E​

ERISA bond​

A fidelity bond required by federal law of anyone handling funds in a sponsored retirement plan. Generally 10% of plan assets handled, subject to a statutory minimum and maximum.

Why it matters to you. Nothing to do with construction and everything to do with someone stealing from the plan. If you sponsor a 401(k), you need one, and your plan auditor will ask for it.

Execution report​

A statement the surety issues showing the bond number, the contract, and the premium charged. It is your reconciliation document.

Why it matters to you. Check it against your own bond register. Wrong contract amounts, wrong rate tiers and double-rated maintenance periods all happen, and nobody catches them except you.

F​

Fade (gross profit fade)​

The difference between the gross margin a job was expected to produce and the margin it actually produced. Measured across the portfolio, not on one job.

Fade within about 1% is excellent. Beyond about 5% it tells the surety that your reported profit systematically overstates real profit.

Why it matters to you. Fade is the trend underwriters care about most, because your net worth comes from reported profit. A 6% margin with no fade is a better credit than a 9% reported margin with 4% fade.

Fidelity bond​

Coverage against employee dishonesty — theft of money, securities or property by your own people. Not a contract bond, though sureties write both.

Why it matters to you. Some owners and many public agencies require one, and it is cheap. It is also the only bond on this page written to protect you rather than someone else.

Final bond​

Shorthand for the performance and payment bonds issued after award, as distinct from the bid bond that preceded them. Often written "P&P bonds."

Why it matters to you. The surety will not issue final bonds without the executed contract and the final contract amount. Send both the day you have them.

Funds control​

An arrangement in which a third party receives contract payments and disburses them to subs, suppliers and payroll on that job. Sometimes a condition of approval on a first-time account or an over-limit job.

Why it matters to you. It costs a fee and some autonomy, and it can be the difference between getting the bond and not. Treat it the same way as collateral: a condition to work your way out of.

G​

General Indemnity Agreement (GIA)​

The contract that makes surety credit rather than insurance. You agree that anything the surety pays out — claim, investigation, attorneys' fees, consultants — you reimburse.

It is typically signed by the operating company, every affiliate, every owner individually, and each owner's spouse, on a joint and several basis. It usually also grants collateral-on-demand rights, access to your books, and the right to take over your contracts.

Why it matters to you. People sign the GIA in a stack of closing paperwork without realising they have put their house behind the company's contract performance. Read it, and have your attorney read it. See the General Indemnity Agreement.

I​

Indemnitor​

Anyone who signs the GIA and is therefore on the hook to reimburse the surety. Usually the company, its affiliates, the owners and their spouses.

Why it matters to you. Being an indemnitor is personal and it does not end when you sell your shares. Getting released from a GIA requires the surety's written agreement, and it is a separate negotiation.

J​

Joint and several​

A liability arrangement in which the surety can collect the entire amount from whichever indemnitor has money, and leave that person to sort it out with the others.

Why it matters to you. A minority owner who signs the GIA can be pursued for 100% of a loss, not for their ownership percentage of it.

L​

Letter of authority​

The letter the surety issues to your producer setting out your single job limit, your aggregate limit, and an expiration date tied to your financial statement cycle.

Inside those limits your producer issues bonds without calling the underwriter. Outside them, every request goes back upstairs.

Why it matters to you. This is why a bond takes either a day or two weeks with little in between. Ask for a copy of your current letter and know both numbers the way you know your bank line.

Letter of credit​

A bank instrument promising to pay a beneficiary on demand. Sometimes accepted as bid security, sometimes demanded by a surety as collateral.

Why it matters to you. A letter of credit consumes your bank capacity dollar for dollar and usually carries a fee. A bond does not touch the bank line at all.

License bond​

A bond required by a state, county or city as a condition of holding a contractor's license or pulling a permit. Small, annual, and usually issued on your credit rather than a full underwriting file.

Why it matters to you. It is a compliance item, not a capacity item, but a lapsed license bond can suspend your license. Diary the renewal in your surety document calendar.

Liquidated damages​

A fixed daily amount the contract says you owe the owner for late completion, agreed in advance instead of proving actual damages.

Why it matters to you. Sureties read the liquidated damages clause, because on a long job an aggressive daily figure can exceed your fee. Price it, and flag an unusual one to your producer at bid time.

Little Miller Act​

A state statute requiring performance and payment bonds on that state's public work, modelled on the federal Miller Act. Every state has one, and the thresholds, notice requirements and deadlines all differ.

Why it matters to you. Do not assume the federal deadlines apply to a state or municipal job. Check the statute for the state the project sits in, every time, and verify the current version with counsel.

M​

Maintenance bond​

A bond guaranteeing you will repair defects in workmanship or materials for a stated period after completion. Frequently folded into the performance bond for the first year.

Rated separately and much more cheaply than a performance bond.

Why it matters to you. A maintenance or warranty period longer than 12 months costs extra premium. Catch it in the General Conditions at estimate time, not after award.

Miller Act​

The federal statute requiring performance and payment bonds on federal construction contracts over $150,000. It also sets the claim mechanics on the payment bond: a claimant without a direct contract with the prime contractor must give notice within 90 days of last furnishing labor or materials, and suit must be brought within one year of last furnishing.

Why it matters to you. These are hard deadlines and a missed one is a total loss. Verify the current law and the current thresholds with counsel before relying on any of these figures — statutes and dollar thresholds change. See payment bonds and when a bond claim happens.

N​

Net worth​

Total assets minus total liabilities. The surety uses analyzed net worth rather than the figure on your statements, and screens net worth against backlog at roughly 7% or better.

O​

Obligee​

The party protected by the bond — normally the project owner, and on a subcontractor bond, the general contractor. One of the three parties to every bond, with the principal and the surety.

Why it matters to you. The obligee name must appear on the bond exactly as the contract documents state it, character for character. "City of Springfield" and "City of Springfield, a municipal corporation" are not always interchangeable, and a mismatch can get a bid rejected as non-responsive.

Overbillings​

Billings in excess of costs and estimated earnings — you have billed for work you have not yet performed. A current liability, credited in full against you.

Why it matters to you. Overbillings are free financing and they feel like cash. They are borrowed from the future, and underwriters look at cash net of overbillings for exactly that reason.

P​

Payment bond​

A bond guaranteeing that your subcontractors and suppliers get paid. On public work it replaces the mechanics lien rights those parties would otherwise have, because public property cannot be liened.

Why it matters to you. A payment bond claim from your own sub is a claim against you, and you reimburse the surety for anything it pays. It is also a rapid signal to the surety that you have a cash problem. See payment bonds.

Penal sum​

The maximum dollar amount the surety can be required to pay under the bond. On a performance bond it is normally 100% of the contract value; on a bid bond it is normally 10% of the bid.

Why it matters to you. Penal sum is the number the premium is calculated from and the number that has to match the final contract amount on the executed bond. Check it before the bond goes to the owner.

Percentage of completion​

The accounting method that recognizes revenue and profit on a job as the work is performed, based on cost incurred against estimated total cost. It produces underbillings and overbillings.

Why it matters to you. This is the basis sureties require. Statements on a completed contract or cash basis will cap your line. See financial statements.

Performance bond​

A bond guaranteeing you will complete the contract according to its terms. The penal sum is usually 100% of the contract value.

Why it matters to you. This is the bond behind a default, and it is the one that puts your GIA in play. See bond types.

Power of attorney​

The instrument by which the surety authorizes an individual — your attorney-in-fact — to sign bonds on its behalf. A copy is attached to every bond issued.

Why it matters to you. Check that the power of attorney is attached and dated on or before the bond date. A missing or stale power of attorney is one of the most common reasons a bond gets bounced back by an owner's contract administrator.

Prequalification letter​

A letter from your surety confirming, without commitment, that you are a client in good standing and that bonding of a stated size is available. Sometimes called a bonding capacity letter or a letter of bondability.

Why it matters to you. Many owners require one to let you onto a bidders list. It is free, it takes a day inside your letter of authority, and it is deliberately worded so as not to be a bond commitment. See prequalification letters.

Principal​

You — the contractor whose performance is being guaranteed. One of the three parties to every bond, with the obligee and the surety.

R​

Rate tier​

The pricing class a surety assigns you, typically one of three, based on financial strength and the type of work. The best tier can be meaningfully cheaper than the worst.

Your tier can vary by type of work inside your own company — a paving contractor might sit in the best tier on straight paving and a more expensive tier on maintenance work.

Why it matters to you. Ask which tier you are in and what would move you up. It is one of the few pricing levers you can actually influence. See what construction bonds actually cost.

Retainage​

The slice of every progress payment the owner holds back until the job is complete, commonly 5% or 10%.

Why it matters to you. Retainage receivable due more than 12 months out gets reclassed out of current assets in the surety's analysis, so it stops helping your analyzed working capital. Chasing retainage release is a balance sheet activity, not just a collections activity.

Return premium​

Premium refunded when the final contract amount comes in below the amount the bond was originally rated on.

Why it matters to you. Return premiums do not arrive on their own. They arrive because you closed the bond out and gave the surety the final contract amount. See bond closeout and final premium.

S​

Single job limit​

The largest individual contract your surety will bond, stated in your letter of authority.

Why it matters to you. A job over your single limit needs underwriter approval, and underwriters do not approve things on the morning of a bid. Over-limit requests need about two weeks.

Sliding scale​

The banded rate structure used to price contract bonds. The rate per $1,000 of contract value falls as the contract gets bigger, so premium is calculated band by band rather than as a flat percentage.

Why it matters to you. A $2M contract is not simply the contract times one rate. Price it with the bond premium calculator before you bid, and remember premium is charged on the final contract amount, not the original one.

Stop payment notice​

A statutory remedy available in some states allowing an unpaid claimant to reach funds the owner or lender still holds for the project. It runs alongside, and sometimes instead of, lien and bond claim rights.

Why it matters to you. Availability, deadlines and procedure vary sharply by state, and a bonded stop notice may be required. Verify the current statute for the project's state with counsel before relying on it.

Subcontractor default insurance (SDI)​

A product some large general contractors buy instead of requiring subcontractor bonds. The GC insures itself against subcontractor default and manages its own prequalification.

Why it matters to you. On an SDI job you may face the GC's own prequalification process instead of a bond requirement — and unlike a bond, SDI carries a deductible the GC will be looking to recover.

Subdivision bond​

Also called a site improvement bond. It guarantees to a city or county that a developer will build the public improvements — streets, sewers, sidewalks — that were promised as a condition of approval.

Why it matters to you. These sit open for years and can quietly consume a large share of your aggregate limit. Chase the acceptance and release actively.

Subordinated debt​

Money the company owes an owner or affiliate that has been formally subordinated to the surety, in writing, on the surety's own form. Subordinated debt gets added back to analyzed net worth.

Why it matters to you. Unsubordinated owner debt is just debt. A verbal understanding that you will not call the loan counts for nothing. This is one of the cheapest capacity improvements available.

Surety​

The company guaranteeing your performance to the obligee. It is lending you its credit rating, not accepting your risk — which is why you reimburse it for anything it pays.

Why it matters to you. A surety bond is not insurance. Everything strange about surety follows from that one fact. See how surety bonds actually work.

T​

Takeover agreement​

The agreement under which a surety, after a default, steps in and completes the contract itself through a completion contractor, taking over the remaining contract balance.

Why it matters to you. It is one of the four options a surety picks from after default, and it is generally among the more expensive ones for you, because everything it costs comes back to the indemnitors.

Tender​

The option in which the surety hands the owner a replacement contractor to finish the work, rather than completing the job itself.

T-listing / Treasury Circular 570​

The U.S. Department of the Treasury's published list of sureties acceptable on federal bonds, with an underwriting limitation for each company. Circular 570 is the document; being on it is being "T-listed."

Why it matters to you. Federal work requires a T-listed surety, and each listing carries a per-bond underwriting limitation. If your bond exceeds that limitation, the surety needs reinsurance or co-surety arrangements, which takes time. Check it early on federal jobs.

U​

Underbillings​

Costs and estimated earnings in excess of billings — work performed that you have not yet billed. An asset created by an estimate, which is why sureties scrutinize it harder than any other current asset.

Timing underbillings are usually allowed in full. Underbillings from unapproved change orders are heavily haircut or disallowed.

Why it matters to you. Watch underbillings as a share of working capital. Above roughly 25% to 30%, your working capital is mostly an accounting estimate rather than a liquid resource, and it will be treated that way. See WIP reporting.

Underwriter​

The person at the surety company who decides whether to write your account, how large your limits are, and whether to approve individual jobs outside your letter of authority.

Why it matters to you. The underwriter is a person with judgment, not a scoring model. Meeting them, answering fast, and never surprising them are worth real capacity.

W​

Warranty bond​

A bond guaranteeing correction of defects for a stated warranty period after completion. Used interchangeably with maintenance bond on most jobs.

Why it matters to you. The first year of warranty is normally included in the performance bond. Anything beyond that is a separately priced surcharge, so read the warranty period out of Division 1 while you are still estimating.

Work in progress (WIP) schedule​

The schedule listing every open job with contract amount, approved change orders, cost to date, estimated cost to complete, billings to date, over- and underbillings, and gross profit.

Why it matters to you. This is the document a surety trusts most and the one most likely to be sloppy. A clean, current WIP does more for your credibility than a good quarter. See WIP reporting.

Working capital​

Current assets minus current liabilities. Before adjustment it is "as given"; after the surety's adjustments it is analyzed working capital, which is the number that counts.

A common rule of thumb is a single job of about 10× analyzed working capital and an aggregate of about 20×.

Rule of thumb

Every $100,000 you leave in the company is roughly $1,000,000 of single-job capacity. Read that again before you take a distribution.

Where to go next​

Not legal advice. Definitions here are general and written for contractors. Statutory requirements, notice periods and bond thresholds vary by state and change over time, and every surety maintains its own credit manual. Confirm specifics with your surety bond producer and your attorney.

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