Surety underwriters go further into a contractor's financials than most lenders ever will. They have to. Unlike a bank, which gets their money back plus interest, a surety company gets nothing when a bond claim is filed. They're on the hook to complete the job or pay the damages. That changes how they read everything.
The WIP schedule is where most of that analysis happens.
If you're advising a contractor who depends on bonding — public work, school districts, municipalities, federal projects — understanding the surety underwriting process is part of knowing how to help them grow.
What Bonding Capacity Actually Means
Bonding capacity has two components that often get conflated.
Single-job limit is the maximum dollar value on any one project a surety will bond. Aggregate program limit is the total amount of bonded work a contractor can have active at once across all jobs.
The rules of thumb have stayed reasonably consistent for a long time: single-job capacity is generally around 10 times the contractor's net worth. Aggregate program capacity is typically 15 to 20 times net worth, depending on the quality of the financials, the surety's confidence in management, and the backlog composition.
A contractor with $1 million in net worth might have single-job capacity around $10 million and an aggregate program around $15 to $20 million. That's not a guarantee — it's a starting framework. The actual capacity depends heavily on what the underwriter sees in the rest of the financials, particularly the WIP schedule.
Net worth is the foundation. The WIP schedule tells the underwriter whether the business is actually managing the work it's taken on.
How the Underwriter Reads the WIP
When a surety underwriter reviews a WIP schedule, they're running through a specific checklist that most advisors don't see clearly.
Estimated cost to complete. This is the single most important number on the schedule, and it's also the one contractors most often get wrong. The underwriter is asking: does this contractor know what it's going to cost to finish these jobs? If the estimated cost to complete has been revised upward significantly since the last reporting period, something went wrong in the field. If it's holding steady or coming down, the contractor is executing.
Gross margin trends by job. The underwriter is comparing the estimated margin on each job to where it started. Margins that have compressed significantly — or that are heading negative — are a red flag. A bond claim almost always starts with a job that went bad financially before it went bad physically.
Overbillings as a cash management tool. Some contractors overbill systematically. They front-load billings early in a project to create a cash cushion. In small doses, this is normal. In large doses, it looks to the underwriter like the contractor is using early billings to cover cash shortfalls on other jobs. That's a pattern that precedes bond claims.
Underbillings as a capacity indicator. Large, aging underbillings tell the underwriter that the contractor isn't billing efficiently. Whether it's a billing department issue, a dispute with the owner, or jobs that have stalled — the underwriter wants an explanation. Uncollected billings are illiquid assets, and a contractor who can't convert completed work into cash is a contractor with a structural cash problem.
The 10 percent rule. Experienced underwriters will look at any job where the actual cost to complete is more than 10 percent higher than the original estimate. That's a flag for closer scrutiny — not an automatic decline, but a conversation. The contractor needs to explain what happened and demonstrate that the same thing isn't happening elsewhere on the schedule.
What Moves the Bonding Needle
Contractors who want to grow their bonding capacity have a limited number of levers.
Net worth. This is the most direct driver of bonding capacity and the one that takes the longest to improve. The fastest path to increasing net worth is retaining earnings inside the business instead of distributing them. A contractor who takes every dollar of profit out of the business at year-end and then wonders why their bonding capacity is stuck has answered their own question.
Working capital. Suretys look closely at working capital — the spread between current assets and current liabilities — as an indicator of the contractor's ability to fund operations through the ups and downs of project cash flow. Thin working capital limits capacity regardless of what the net worth shows. The rule of thumb for many underwriters is that working capital should be at least 10 percent of the aggregate bonded program.
The quality of the accounting. This matters more than most people admit. A contractor whose financial statements are reviewed or audited by a CPA presents a fundamentally different risk profile than one submitting internally compiled financials. Suretys want to know the numbers are real. CPA-prepared, reviewed, or audited financials signal that someone else has looked at the books with an independent eye. For a contractor trying to grow their bonding program significantly, moving to reviewed or audited statements is often a prerequisite.
Backlog composition. An aggregate program filled with public jobs for creditworthy owners is a different risk profile than one filled with private work for smaller developers. Suretys pay attention to who the contractor is working for, not just how much they're doing.
What the Advisor Can Do
If you have a contractor client who is running into bonding capacity constraints, the conversation usually starts in one of two places: they've bid work they can't bond, or they're watching competitors win public jobs they can't touch.
The most useful thing you can do before calling the surety agent is know the WIP schedule cold. Go through each job. Identify the ones with compressed margins. Understand the underbilling and overbilling positions. Be ready to explain the exceptions.
Surety underwriters respect advisors who understand construction. They've seen too many CPAs who know how to prepare a tax return but can't explain what a cost-to-complete adjustment means. If you can walk into a prequalification meeting and discuss the WIP schedule intelligently — job by job, margin by margin — you're adding real value to the relationship.
The contractor who can bond more can bid more. That is not a small thing for a business trying to grow.
Joshua R. Bohlke spent over a decade as a commercial banker before serving as CFO and financial advisor to construction and specialty-trade businesses. He works with agents, CPAs, and advisors helping their contractor clients build and protect bonding capacity.
jrbohlke.com • The Analysis