Determining Standard vs Non-Standard Bond Limitations

June 26, 2023

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Many active bond users can sometimes be limited in their bonding potential. These limitations occur differently depending on the bond program. There are multiple ways to determine the bond limits for both standard and non-standard bond programs.

Standard Bond Program

  • It is common for active bond users to provide the Surety with a CPA fiscal year-end statement and internally produced interim statements.
  • Underwriters consider several factors in determining the size of a bond program. Typically, a Surety is willing to consider providing a bond program that is roughly 10x working capital.
  • Working capital is calculated using a balance sheet. It is a measure of contractor liquidity, and it indicates whether a company has enough short-term assets to cover its short-term debt.
  • Other asset classes might be included but at a discounted rate. For example, inventory is often included as part of your current assets but is calculated at 50% of the stated value. Marketable securities such as stocks and bonds are allowed as an asset as well but are calculated at around 80% of their stated value.

Non- Standard Bond Program

Contractors may not have adequate working capital to support a traditional bond program. In these cases, the Surety may opt to use the following tools and methods to establish a bond program.

  • The Surety may use funds control to mitigate payment risk. Often a third-party funds control company will administer progress payments from the obligee to the contractor by setting up a separate bank account in the contractor’s name. Progress payments will be dispersed by the funds control company to suppliers and subcontractors, along with payment to the contactor to cover profit and overhead.
  • The Surety may take real estate or cash collateral to establish a bond program.

Cash and accrual statements are considered but often limit bonding potential. The preferred accounting method is “percentage of completion.” This considers underbilling's and recognizes revenue from projects as they progress. This method may not be appropriate for all contractors. Reach out to TSIB and find out if this works for your company. 

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Topics: Surety Bonding

Written by The TSIB Team

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