Construction Bonding: What Does a Surety Want to See?

When bidding on public or private construction projects, contractors often face a critical requirement: securing a construction bond. These bonds, which are sometimes referred to as contract bonds or surety bonds, are almost a form of insurance. They protect project owners against financial damages in the event your company is unable to fulfill its contractual obligations.

Surety bonds not only provide assurance but also serve as a testament to a contractor’s financial strength and operational stability. For your company to win large-scale construction projects, it’ll be required to secure a surety bond in an amount equivalent to the value of the contract.

Think of the surety as your business partner. They’re assessing not only your ability to complete the project but also your overall business health and track record. Securing bonding capacity can open the door to larger projects, serving as the foundation for your company’s long-term growth. But if you fail to prepare adequately for the bonding process or miss the mark on key financial and operational benchmarks, it can severely limit your company’s potential.

Surety bonds can be the key to winning a project. But understanding what sureties look for during the evaluation process is just as important as submitting a competitive bid. Let’s break down the essential factors sureties evaluate, including financial reporting, liquidity, project management and more. By addressing these critical areas, contractors can position themselves for success and build stronger relationships with sureties — and make their business ready to take on the next challenge.

Exploring the Construction Bonding Process

If your construction company has never been bonded before, the process might feel unfamiliar. But it’s an essential step in winning many projects, especially government or large private contracts..

When submitting a bid for a project that requires contractors to be bonded, your company will be required to obtain a bid bond. A bid bond is essentially a promise you make when submitting a project bid. It demonstrates to the project owner that, if you’re awarded the contract, you can get a performance bond, which ensures you’ll complete the project as agreed.

To get bonded, you’ll work with a bonding agent — a key partner for your construction company. They’ll gather information about your company (like financial statements, details about the project and your experience) and share it with sureties. The surety’s underwriters will assess your financial strength, experience working on similar projects and overall qualifications before offering terms and pricing.

You’ll pay a premium based on the level of risk the surety assigns your project. Bonding premiums are typically in the low-single digits. The higher the risk, the larger the premium. For instance, if you were to be bonded for a $10 million project and judged to be relatively high risk, you might pay a $250,000 premium to the surety company (2.5%), whereas a contractor that’s deemed less risky might only pay $175,000 (1.75%).

During the project, you’ll be expected to stay in touch with the surety, providing updates, financials and progress reports. Building trust with your bonding agent and surety is crucial; it can lead to smoother processes, lower premiums and more opportunities as your company grows.

5 Keys to Strong Relationships with Sureties

Sureties aren’t just bond providers. They’re partners who evaluate your business and play a pivotal role in your ability to secure future projects.

Establishing trust and demonstrating reliability will help your bonding capacity grow alongside your business. Following the five pieces of guidance listed below will help you present your surety with what they want to see: improving your potential to be bonded at competitive rates for the types of projects you want to work on.

1. Accurate and Transparent Financial Statements

Sureties rely heavily on financial statements to assess a contractor’s ability to fulfill obligations. Submitting clear, accurate and transparent financial information is foundational to building trust with your surety. Without reliable financial data, it’s impossible for a surety to accurately evaluate your business’s stability or bonding capacity.

When producing your financial statements, keep the following construction accounting best practices in mind:

• Maintain work in progress (WIP) schedules: Ensure these are detailed and up to date, as they provide insight into your ability to manage ongoing projects effectively. A well-maintained WIP schedule highlights trends in profitability and can help identify potential cash flow issues before they arise.
• Consistency: Stick to recognized construction accounting standards, such as the percentage of completion method, and avoid frequent changes to your accounting methods. Consistency demonstrates reliability and builds confidence in your financial practices. Some sureties will expect to see your financial statements every six months, while others may want them quarterly.
• CPA-reviewed statements: Sureties prefer CPA-reviewed or audited financials over internal records, as these add a layer of credibility and assurance.

Learn More: An Overview of Key Financial Statements for Construction Companies

2. Strong Working Capital and Liquidity

Your financial position is one of the first things a surety will evaluate. Working capital is a key metric that demonstrates your ability to handle unexpected challenges during a project. Companies with strong liquidity show they’re prepared for both routine expenses and unforeseen issues.

Having cash in the bank makes it easier to address issues that might arise during the project. Sureties want to see:

• Healthy cash balances: Having cash reserves signals that your company takes a responsible approach to financial management and is prepared for unforeseen expenses. Sureties feel more comfortable working with contractors who demonstrate financial stability. Take note that this might mean leaving more money in the business than you usually do, particularly at year-end.
• Access to lines of credit: A robust line of credit shows you have financial flexibility. Responsible credit use also reflects your ability to manage short-term funding needs without compromising the long-term stability of your business.

3. Experience and Track Record

Sureties don’t just look at your finances; they want to understand your experience and ability to complete projects successfully. Your operational history and track record of working on projects similar to the one you’re seeking bonding for are considered critical indicators of future performance.

Part of this is your operational efficiency, but another component is your proven ability to resolve disputes or manage challenges. The better your resourcefulness and ability to problem solve, the better your chances of securing bonding.

As your company grows and continues to seek further bonding capacity, it’s wise to form strong relationships with bonding agents and sureties. Familiarity breeds comfort, and the stronger your relationship with your partners, the better.

4. Efficient Systems and Processes

Having robust internal systems for project management, accounting and compliance signals to sureties that your business is well-organized and capable of meeting its obligations.

If you’re in the process of securing a construction bond, you’re no longer a small company — and you shouldn’t act like one. Consider investing in systems and processes including:

• Integrated project management and construction accounting software to track progress, costs and timelines in real time. This ensures transparency and control over project execution.
• Regular internal audits and process reviews to identify inefficiencies and improve operations. A proactive approach to continuous improvement is a positive signal to sureties and indicates your business is equipped to identify and resolve any problems before they become major issues.
• Specialized staff members or consultants to handle complex issues. Consider bringing on an experienced construction accounting firm to manage your accounting and bookkeeping on an ongoing basis and investing in training your staff on compliance with regulatory and contractual requirements.

5. Open Communication and Proactive Planning

Sureties value contractors who maintain open lines of communication. Be proactive in sharing project updates, potential challenges and your plans to effectively address them. Surprises are the last thing a surety wants.

Some tangible examples of how contractors can proactively communicate with their surety include:

• Provide regular updates on project performance, including detailed cost-to-complete analyses.
• Be up front about changes in business operations like new hires, supplier adjustments or project delays. Don’t just bring problems, though; share the solutions you’re implementing.
• Share supplemental documents, such as work in progress (WIP) schedules, to keep your surety informed of ongoing developments.

Partner with James Moore for Support in Securing a Construction Bond

Securing a construction bond is about much more than your company’s financial metrics. It’s a comprehensive evaluation of your business’s stability, capability and reliability. Sureties want to know you can not only deliver on a project but also navigate challenges effectively.

By prioritizing accurate financial reporting, maintaining healthy liquidity, demonstrating a proven track record and building efficient systems, you can position your business as a strong and trustworthy partner. Building and nurturing a solid relationship with your bonding agent and surety will streamline the bonding process and help unlock new opportunities as your business grows.

For more guidance on improving your bonding capacity and preparing your business for success, consult the specialized construction CPAs at James Moore.

We partner with many growing construction companies looking to secure their first bond, as well as established companies looking to improve their premiums. Our professionals will partner closely with you to ensure you can satisfy surety requirements and secure the bonding capacity needed to take your business to the next level. Contact us today to learn more about how we can help.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.