Why Bonding Capacity Is As Good As Gold

Why Bonding Capacity Is As Good As Gold

Why Bonding Capacity Is As Good As Gold

By Brady Cox

For contractors, bonding capacity is as good as gold.  It enables the company to pursue new projects with the confidence that their surety will back the contracts when the need arises. This is the source of increased revenues and greater profits!

How is available bonding capacity calculated? First, a bonding line is determined, consisting of an aggregate (total) amount and a single per-job limit.  The aggregate is then decreased by different factors that consume the line. What can be done to minimize this effect, so bonds remain available for your company? Let’s look at how the numbers are developed and how they can be appropriately managed.

Both bonded and unbonded work is included in the analysis. Here’s the math:

Aggregate capacity amount minus

  • Undecided bids (full contract amount)
  • Low but unawarded bids (full contract amount)
  • Projects that are awarded, signed, or just started (full contract amount)
  • Remaining costs to complete on open contracts

Equals the available bonding capacity.

So how can agents help their contractors preserve this vital asset?

  1. Prompt reporting of bid results – When bid bonds are issued, the entire estimated contract amount is deducted from available capacity, not the bid bond amount.  The capacity is not restored until the “not low” results reach the underwriter.
  1. Updated Work In Process (WIP) schedule:
    • Surety underwriters and accountants determine a contractor’s “current work load” based on the costs they must incur (such as labor and materials) to complete their open contracts.  When there are no remaining costs to incur on a project, it is considered completed.  The WIP schedule shows revised “Costs Incurred to Date” and “Estimated Costs to Complete.” Both increased costs incurred and decreased future costs improve available capacity.  Future costs may be reduced by progress on the contracts as well as greater labor efficiency, material cost savings, improved scheduling and other factors.
    • A reduction in the contract amount (by amendment) has the same effect because it reduces unincurred costs. Report such amendments immediately.
  1. Prompt reporting of completed or terminated work, including unbonded projects, removes it from the work load and therefore increases availability.

Note: Factors that can reduce available capacity include unincurred contract costs that increase for any reason and the addition of new unbonded projects.

*The aggregate capacity amount is based on all the contractor’s professional and financial capabilities. If unbonded projects are acquired, they consume resources (supervisory staff, equipment, etc.) and therefore must be recognized within the use of the bond line.

Available bonding capacity is a moving target subject to frequent revision.  To maximize availability, send your bonding agent the right information and keep it current.

Brady K. Cox is a Principle with the Baldwin-Cox Agency, LLC. in Dallas, TX.  The agency was founded in 1990, and has always focused on providing construction bonds to contractors. Today the Baldwin-Cox Agency,LLC  is one of the largest bond producers in all of North Texas.

The Punch List is Triune’s proprietary blog for discussing issues and providing insights specific to the commercial construction industry. Copyright 2013 TMV, LLC (Triune).  Any and all rights reserved.

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