Construction Bonding Capacity Explained
Bonding capacity is an important area of surety bonds to understand as a contractor. Knowing how your capacity is calculated, what factors are used to determine it, and what steps you can take to grow your bondability can help you build your business.
As part of CSBA’s effort to educate California contractors on surety bonds and all the areas essential to securing them, we’ve put together a guide to help you understand what bonding capacity is and how to improve it.
What is Bonding Capacity?
Bonding capacity is the limits of surety bonds that a surety company will provide to a contractor. There are two types of bonding capacity that surety companies set. The first is the largest single project the surety will bond. The second form of bonding capacity that surety companies set is the total backlog of bonded and unbonded projects the surety will support the contractor having.
The reason surety companies set a single job limit that they will bond is because it has been shown in the construction industry that taking on too large of a project increases the risk and chance of failure. The same is true for contractors that grow their backlog too quickly, which is why surety companies set a total bonding capacity.
The Guide to Increase Your Surety Bond Capacity
To help California contractors understand bonding capacity and how to increase it, we’ve assembled this handy guide below to help you navigate the processes along with tips for increased capacity.
How is Capacity Calculated?
As discussed previously, there are two types of bonding capacity that can be calculated:
- Capacity per project: the size of bond a surety is willing to issue to a contractor for a particular project
- Aggregate bonding capacity/total capacity: the total amount of bonds a surety will provide to a contractor for all the work in their backlog
While both kinds of bonding capacity are based on similar information and factors, they are calculated a little differently. For example, your bonding capacity per project is calculated by the surety examining the largest project you’ve profitably completed and the average size of projects you’ve completed.
Generally, a surety will approve a bonding capacity per project that is twice the size of your largest project if the other factors are satisfied, but there are some important exceptions to the guideline, as outlined below, where a surety will consider bonding even larger jobs:
- The larger project is for a previous client the contractor has worked with
- The larger project is similar to projects the contractor has completed before
- The timeline for completing the larger project won’t strain the operational resources of the contractor
- The larger project won’t have a cash flow demand more excessive than previously completed projects
- A significant portion of the job is material or subcontracted out
Helpful Articles from CSBA
To learn more about how sureties consider raising the bonding capacity for contractors on a single project, we strongly encourage you to read here:
Aggregate or total bonding capacity, as mentioned earlier, is the total amount of bonding a surety will extend to a contractor at any one time. To learn more about aggregate bonding capacity, we strongly recommend reading here:
In establishing an aggregate limit, sureties are trying to ensure the contractor has the financial resources to cash flow the work. To do so, the surety will review the contractor’s financial information both on a company and personal level as well as look at access to capital through bank lines of credit. To gain an understanding of the financial ratios sureties look for, read our article:
Tips to Increase Capacity for Larger Construction Bonds
As mentioned, the best way to prepare for larger projects coming up and to take advantage of greater opportunities is to invest in and take steps to increase your bonding capacity. We at CSBA are committed to educating California contractors on the financial end of our industry and helping them to achieve their business goals using our extensive expertise with surety bonds. As part of that effort, we strongly recommend you read our 7 Tips to Increase Bonding Capacity and begin building up your aggregate and per-project capacity to secure the projects you want:
Using Higher Bonding Capacity as a Marketing Tool
A higher bonding capacity is usually discussed in terms of being able to qualify for larger surety bonds, but that doesn’t address the many other advantages that come with a larger capacity. Oftentimes, public agencies and general contractors will require the contractors that want to work for them to prequalify and submit a letter from your surety stating your bonding capacity. The brand name and reputation of the surety company along with having higher bonding limits says a lot about the contractor and their ability to perform, which can give you a leg up on being selected.