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Here is an easy and legitimate way to fit more projects into a bonding line.
Virtually all Surety Bonding programs include a “single job limit” meaning the maximum dollar value of one bonded contract, and an “aggregate amount” which is the maximum permitted exposure at any one time.
When a construction company gets close to their aggregate amount, it can hinder the ability to pursue additional projects and keep their pipeline full. Understanding how the aggregate is administered by surety underwriters can help get the most out of this critical element.
The first thing to know is that current info is required. If the underwriter has not been updated in more than 30 days, you can expect a request for an update.
This info may be conveyed as a dollar figure “We have $876,000 on hand to complete” or a detailed schedule may be required. Such reports are called a Work On Hand (WOH) schedule or a schedule of Work In Process (WIP). We call it the latter because computers hate to type “WOH.”
The WIP schedule can be a short form containing 5 or 6 columns of info on each incomplete contract, or they can be twice that involved. It is important to use the format the underwriter requires, and fill out the form completely.
So here are the interesting parts.
Contractors tend to think of their projects based on the status of the Billings. Obviously, that’s how they make their money. No billings, no cash flow, no company.
- How much do you have left on that job?
- (Contractor replies) We have $350,000 left to bill.
Surety underwriters and accountants view the projects based on Costs. This is because, even if the project is 100% billed, it is not complete until there are no more costs left to incur.
- How much do they have left on that job?
- (Bond underwriter replies) Their remaining costs are $290,000.
S-T-R-E-T-C-H That Bonding Line
So the first point is to know that the surety is viewing the “Remaining Costs to Complete” when determining how much aggregate is in use / or available. MORE costs incurred to date mean the job is closer to completion, and less aggregate is in use – and therefore available to support the next project. Contractors are cheating themselves if their cost data is not up to date, or they are failing to include materials delivered to the site, soft costs such as insurance, bonding, etc.
The second point is that most underwriters include ALL work in the calculation, but some only view the condition of the jobs they have bonded.
Be sure you know what is being requested. It is incorrect to show tons of work if the underwriters only want details on the two jobs they bonded. If you’re not sure what’s needed, ask!
Understanding how aggregate capacity is calculated and providing the right info can dramatically increase the portion of a contractor’s line that remains available.
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