When performance bonds are required after winning a bid, your focus should be on gearing up for the project, not whether or not your bonding capacity is sufficient, and/or whether or not the new performance bond will become a barrier to you being able to secure a bid bond for your next bid opportunity. Part of growing your business is expanding your bonding capacity, to help ensure you’re able to get the surety bonds you need for the construction jobs you want.
Since performance bonds are often mandatory, let’s discuss what a performance bond is and how to qualify for larger ones.
What is a Performance Bond For?
A performance bond is a type of surety required by law for any construction project funded by tax dollars, meaning any government project at local, state, and federal levels. A performance bond can also be required on private projects, so even if you’re not a contractor that focuses on public works, it’s important to know what it is. What the performance bonds ensure is that the contractor performing the work will meet the obligations outlined in the contract with the owner or the general contractor (when referring to a subcontract performance bond). If the work isn’t completed as per the terms and conditions of the contract the project owner or general contractor can file a claim against the performance bond.
While there are of course exceptions to this rule of thumb, typcially on a public works project, if a performance bond is going to be required, a bid bond will be required at the time of the bid. If this is the case, you’ve likely already completed most of the heavy lifting for prequalifying for the performance bond.
To read more about the differences and how bid bonds work with performance bonds, we encourage you to read here: Bid Bond vs Performance Bond – CSBA
Requirements for Performance Bonds
To qualify for a higher performance bond it is important to familiarize yourself with performance bond requirements. People who aren’t familiar with bonding, often think performance bonds are like an insurance policy but they are quite different from each other and that is important to remember. The requirements to get bonded depends more on the size of the performance bond needed than a set of standard conditions:
- Bonds less than $750K can be issued with a simple one or two-page application and strong credit, as well as past experience of similar sized jobs completed.
- Bonds greater than $750K to $1.5 million require financial statements from both the company and the contractor who owns it.
- Bonds over $1.5 million will require a CPA-prepared financial statement and job performance tracking reports (such as a work-in-progress report).
While the project size dictates the size of bond that a contractor needs to obtain, to get bonded, in addition to the financial information referenced above, the surety company will want to review the contractor’s past business experience to help determine what size of job the surety is comfortable supporting. This can be challenging for younger contractor companies, that are looking to grow, but with the right preparation, it is a hurdle that can be overcome.
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Factors for Larger Performance Surety Bonds
To get bigger performance bonds you must first increase your bonding capacity, as mentioned earlier. There are a few ways you can improve your bonding capacity now with a few steps:
- Improve your financial reporting: Construction accounting is distinct from other forms of accounting and the best way to provide financial documents that will assure a surety provider of it’s accuracy is by working with a construction-oriented CPA.
- Strengthen the business’s financials: By limiting your fixed asset purchases and retaining earnings within the company, you’ll have a greater financial cushion for working on a construction project. This gives great assurances to the surety company that you have extra financial resources if needed.
- Working with a Surety Specialist: This is especially important for newer contractor companies as an experienced surety agent can help speed up the bonding prequalification process while guiding you through it and help you take structured steps to increase your bonding capacity, which will help you get the size of performance bond needed.
- Obtain a bank line of credit: Surety companies like contractor’s to have access to a bank line as a safety net if cash flow tightens up.
Bonding capacity can grow quickly by following these four steps, but it also requires long a long-term planning to grow along with your company. To read more about how bonding capacity is calculated, we strongly encourage you to read this article: Aggregate Bonding Capacity: What is it and How is it Calculated? – CSBA
How to Get Bonded for a Larger Performance Bond
The best way to grow your bonding capacity and qualify for the size performance bond you need is by working with a surety agent who is an expert in surety bonds. The right surety agent can help match you with the right surety company, connect you with construction-oriented CPAs, and help structure your steps forward that increase your bonding capacity as well as reach your greater business goals.
We at CSBA are that kind of surety agent, with the experience and expertise to help both newer contractors qualify for the performance bond size needed and help seasoned professionals reach their business goals. Working with us means having access to surety programs and knowledge while also benefiting from our connections in the surety industry. Rather than juggling running your business and worrying about how to get the large performance bonds necessary for the jobs you want, work with the surety experts.
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