Secret #91: Bonding Capacity – Enough is Enough

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Contractors know Surety Bonding Capacity is good to have and the more you have the better! But how do you determine the amount that is enough?

Primer on Capacity

  • Bonding capacity is normally described as an amount per project and an aggregate total. The amount per contract is referred to as the “single,” meaning the amount available to support a single contract. The aggregate is the incomplete portion of all the current and new contracts on any given day.
  •  Bonding companies look at the contractor’s capabilities when determining the single amount they will support. These include similar jobs successfully completed, available resources such as supervision, labor, and equipment as well as financial liquidity.
  •  To evaluate the aggregate, underwriters look at historical production levels, financial strength and other relevant factors.
  •  They also consider the capacity amount the contractor is requesting. For successful management of the relationship, it is beneficial to provide what the client desires if possible.

So how does the contractor determine the capacity levels to request?

First off, underwriters are unlikely to support new projects more than double the size of prior work. In addition, they generally expect the financial analysis of the last company fiscal year-end financial statement to show adequate levels of strength for such projects. (Read Secrets of Bonding # 4 for a complete explanation regarding working capital calculations.)

The aggregate capacity is generally double the “single” amount although there may be cases where a limited program consists of a single and aggregate for the same amount. This would mean the underwriters only want to support one project at a time with no overlap.

As far as the ability to bid on multiple projects while performing other work, the solution is to have an aggregate amount that is a multiple of the single, for example $1 million single / $2 million aggregate (referred to as “one over two”).

To decide if the aggregate is enough, first determine if it consists of bonded work only or all projects. This enoughvaries by underwriter. It is reasonable and likely they will say “the aggregate includes all work, bonded and unbonded.” This approach takes all the contractor’s obligations into consideration, everything that may tax financial and human resources and therefore affect the bonded work.

The more liberal treatment is to define the aggregate as only including bonded work. This provides unlimited potential to add unbonded work with no scrutiny by the surety.

Capacity Management Tips

One factor that affects the adequacy of the aggregate is the company’s bidding strategy. Stacking up multiple bids in rapid succession consumes the aggregate more quickly.

The prompt recognition / reporting of progress on bonded jobs and their conclusion has the opposite effect. It helps make more capacity available.

Knowing when current bonded projects will complete can be helpful. Underwriters may support bids knowing that the start of the new project will be after the completion of a current bonded job. This is a slightly creative way of stretching the capacity with a view toward the future. Some underwriters will exercise this flexibility.

Conclusion

In our experience we find that capacity is the most important element of a bonding program.

Contractors are always concerned about the competitiveness of their bond rate. But if you don’t have enough capacity to add the new project, the rate doesn’t really matter.

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