Surety Bonding

A surety bond is a three-party agreement in which a surety company guarantees that a contractor will perform a contract as promised. If the contractor fails, the surety steps in to make the project owner whole, then comes after the contractor to recover the loss.

Bonding is not insurance. Insurance spreads risk across a pool of policyholders. A surety bond is closer to a line of credit: the surety expects to be paid back for any claim it covers.

The Three Parties

• Principal — the contractor doing the work
• Obligee — the project owner who needs to be protected (often a public agency or private developer)
• Surety — the company issuing the bond, backing the principal's obligation

The Three Bonds You'll See Most Often

• Bid bond — guarantees that if the contractor wins the bid, they'll sign the contract at the bid price
• Performance bond — guarantees the contractor will complete the work according to the contract
• Payment bond — guarantees subcontractors and suppliers get paid

On federal projects over $150,000, the Miller Act requires performance and payment bonds. Most states have "Little Miller Acts" that mirror this for state and local public work. Private owners often require bonding too, especially on larger jobs and projects with bank financing.

Single and Aggregate Limits

A surety doesn't write a blank check. They issue two limits:

• Single limit — the largest individual contract they'll bond
• Aggregate limit — the total bonded backlog they'll carry across all projects

A contractor with a $5M / $15M program can bond a single $5M job and run up to $15M of bonded work at once. Both numbers move together as the underwriter's view of the contractor changes.

What Underwriters Look At

Surety underwriting is built on the three Cs: capital, capacity, and character.

• Capital — working capital and net worth on the balance sheet. A common rule of thumb is bonding capacity around 10x working capital and 15–20x net worth, but it varies.
• Capacity — the ability to actually run the work. Project history, equipment, key personnel, backlog mix.
• Character — references, payment history, litigation history, owner reputation.

Underwriters want clean WIP reports, reviewed or audited financials, and a track record of finishing jobs at or above bid margin. Losses on the WIP, fade in gross profit, and tight working capital all compress capacity fast.

Why It Matters Operationally

Bonding capacity sets the ceiling on what a contractor can pursue. A contractor with strong financials and weak bonding can't bid public work above their single limit. A contractor whose backlog is approaching aggregate is locked out of new bids until existing jobs burn down, even if the pipeline is full.

Treating bonding capacity as a number that's only checked once a year is how contractors get stuck. Treating it as a living constraint, updated as WIP, cash, and backlog move, is how they grow into larger work.