When you're getting into bidding on construction projects, you've probably heard of the term, bonding capacity.
By the end of this post you'll understand:
- The different stages of bonding capacity
- Why bonding capacity matters so much
- How you can get started today
What Is Bonding Capacity?
Bonding capacity, at a high level, is a view of your business and its ability to handle and complete one to many simultaneous construction projects.
When you're getting started with bonding capacity, you can think of it as a pre-approved limit on how much construction surety bond coverage you can initially obtain when you need it.
The surety bonds you need on a given project almost always include the:
For example, here at Surety Bonds Direct, as your surety bond producer we excel at helping contractors get approval up to $3 million in bonding capacity with nothing more than a soft credit check of business ownership.
I'll break that down in a minute, but let's look at the different phases of capacity.
The Difference Phases of Construction Bonding Capacity
The phases below are how we like to think of contractors at different stages of taking on larger commercial or government jobs.
These are not "official" stages, but they give you clear buckets of where your business is and where you may want it to get to.
Phase One: Getting Started In Construction Projects
As you're getting started, it's likely your business is only so big.
You can only take on jobs of a certain size and only one maybe two at a given time.
As you're getting started, you may only require a bonding capacity of $500,000 or $1 million.
Let's look at the $500,000 amount. This means:
- You can bid on one project up to $500,000 in value
- Or you can bid on multiple projects with the total of all projects not exceeding $500,000
Again, at this level and typically up to $3 million in pre-approved capacity, we only need a soft credit check of your construction business ownership.
Phase Two: A Growing Portfolio of Completed Projects
When you have successfully built a portfolio of completed projects, you're at a point where you can increase your bonding capacity.
Maybe times this might only entail going from your approved $500 million to $1million or maybe up to $3 million in available capacity.
At this level you still only need a soft credit check of business ownership but your portfolio of successful projects will help you easily get approved for higher amounts.
This portfolio of successful projects can also be used to potentially get you lower rates for your performance and payment surety bonds.
Typically the rate for these bonds is 3% but we have helped clients get below 3% because they demonstrated a history of completing projects of a similar size as the one they were currently bidding on.
Phase Three: Over $5 Million In Capacity
As you get up to and over $5 million in pre-approved bonding capacity, your surety producer and underwriter require a more formal bonding program.
A more formal bonding program entails the 3 C's for construction bonding programs:
- Character
- Capacity
- Capital
What is Character?
Character is a more in-depth review of your:
- Surety bond history
- Credit reports
- Reputation and active involvement in the industry
- Financial trends
- Tax liens and other potential negative financial setbacks
It's not uncommon for contractors to get letters of recommendations and take a more active role in reputation management online with their reviews.
When projects get significant in size, the surety bond producers like us and underwriters want to build a close relationship with the construction company.
What is Capacity?
This is what we've been discussing in this post, but at a larger level. You need to demonstrate how your company can fulfill simultaneous projects and complete them according to the contract and on time.
This includes your:
- Supplier relationships and employee support
- Access to equipment and materials
- Administrative capacity to keep accurate records for each project
- Business and project planning
- Risk management including insurance needs, employee safety and scopes of work
A major part includes work in progress reports (WIPS) on a quarterly basis.
You would prepare detailed reports of your currently active projects and where they stand, plus the projects you're considering and actively bidding on.
Your surety provider and underwriter want to ensure you're not stretching your business thin and opening yourself to the risk of failed projects.
What is Capital?
This entails regular updates on your business's financial strength including up-to-date:
- Balance sheet
- Cash flow statement
- Project specific financials
But as you're getting started you can get approved for up to $3 million dollars in bonding capacity with only a soft credit check of your businesses ownership.
Bonding Capacity Important Rules
When you get approved for a bonding capacity amount, the underwriting surety typically has rules your projects must meet, for example:
- The completion time can't be in excess of 18 months
- Bid spreads can't be bigger than 10%
- The project can't be one where you're taking over for a prior contractor who defaulted
So you have to submit your project details just to prove that it falls within the rules. Once approved, we can instantly get your bid bond, performance bond, and payment bonds issued.
If you take on projects that don't meet a couple rules, we would just help you get that specific project approved with a different surety company.
As you can see, we at Surety Bonds Direct, as your bonding provider and partner, we will work hard to get you bonded and manage your growing portfolio.
Are You Ready To Have Your Bonding Capacity Approved?
Call a bond specialist today at 1-800-608-9950 and we'll help you get approved for the amount that makes sense for your business.
Remember this process will require a soft credit check of you and any other owner in the business.
Once we have you approved, we'll issue you an approval letter and you're ready to start bidding and building your project portfolio.
