In the surety world, the term “aggregate bonding capacity” is used to refer to the total amount of credit extended by a surety company to a particular contractor at any one time, and it is probably one of the most misunderstood aspects of surety programs for contractors.
Many contractors think aggregate bonding capacity means the total number of bonded jobs they can have outstanding or the amount left to bill of their backlog. While these are correct to some extent, there are many other important nuances that can impact a contractor’s ability to bond additional work, and understanding these nuances can mean the difference between an “Approval” or “Declination” on your next bond request.
Bonded Jobs or All Jobs
Aggregate bonding programs are calculated in two different ways. The most common way is to look at all jobs – both unbonded and bonded projects. This means even your unbonded projects count against your available bonding capacity.
In some instances, it can make sense for a surety to look only at the bonded projects when determining bonding capacity. This is more often used when a contractor’s backlog consists mostly of unbonded projects and they may only have a few bonded jobs at one time.
At first glance, bonded only aggregate programs may seem better. However, sureties usually set them at smaller amounts than aggregate programs encompassing all of a contractor’s work. A professional surety agent like CSBA, can help determine which avenue is better for your company.
Cost to Complete
When surety companies look at a contractor’s backlog, they focus on the contractor’s cost to complete the work. This is different than the amount remaining to bill, because it removes gross profit from the calculation, which can be significant.
The other important aspect of using cost to complete is it is constantly changing. Every month as you complete work, your cost to complete will decrease making room for new work. Similar to drawing down on a line of credit that opens back up as you pay it back, your bond capacity starts to open back up as you work off your projects. Many sureties will even deduct the estimated amount of work you will complete in the next month or two since many of the projects you pick up today will take a month or two to start.
At CSBA, understanding and using runoff of work (both actual and projected) is a huge factor in enabling us to free up bonding capacity for our contractors.
Ways to Free Up Available Capacity
When sureties issue bid bonds they are in effect providing a guarantee to the owner to issue the performance and payment bonds. Therefore, the sureties always have to approach projects on the basis that they could be awarded. Because of this, sureties count bids against a contractor’s backlog. As a result, it’s important to update your surety with bid results to clear off projects from your available bonding capacity.
Types of projects that sureties don’t count against a contractor’s bonding capacity:
- Preconstruction work
- Time and material
- Cost-plus work with no guaranteed maximum price.
Job order contracts, federal MATOC’s or IDIQ’s are not counted in their entirety against a contractor’s aggregate capacity since the work is issued in task orders over an extended period of time. Depending on the structure of the contract, the surety may just count each task order awarded or a small percentage of the overall contract. Therefore, it’s important to note those in your on your work in progress reports.
Bonding back subcontractors can help free up bonding capacity as well. While sureties don’t necessarily deduct the entire value of the subcontract, they are usually willing to provide some wiggle room to the available capacity knowing that some of the risk has been mitigated.
Lastly, being able to regularly update your surety with work on hand schedules showing your current cost to complete, can help open up additional bonding capacity especially if you are working off projects faster than they may be giving credit for.
Conclusion
Understanding the intricacies that sureties use to calculate aggregate bonding capacity can make a significant difference in ensuring you have the bonding you need to continue growing your business. And this is where using an agent that specializes in surety rather than one that dabbles in it, can make all the difference. At CSBA, we view our job to help educate and guide our contractors on how to reach their goals.
