Bonding capacity is an important issue for contractors as their capacity will determine which projects they can pursue.
A company’s bonding capacity is generally a single and an aggregate limit. Bonds are issued on a per job basis and the single limit is the per job amount a contractor is allowed for any one contract and bond. The aggregate is the maximum a contractor can have at any one time, and is comprised of the following:
- Remaining costs to complete on any projects started
- Complete cost of all awarded, signed but not yet started contracts
- Complete contract amount for low but not yet awarded bids
Typically the aggregate amount will include all contracts, both bonded and unbonded, as this is an indication by the surety as to how much work they feel the contractor can undertake without being overextended.
Below are some of the items a surety may review when determining a contractor’s single and aggregate capacity:
- The company’s financial strength including working capital and net worth
- Available bank operating lines of credit
- Personal financial strength of the company’s owners
- Financial strength of any affiliate companies
- Personal credit scores of owners and the D&B of the company
- Completion of projects similar in size and scope to the bonded project
- Project references
- Current Work on Hand
It is important to note that all lines of bond capacity are conditional. A bond can be declined for various reasons, even if it falls within the contractors single and aggregate capacity limits. The type of work being performed, the breakdown on the costs, the bid spread, the bond forms being used, and the form of the contract to be bonded are all items reviewed by the surety each time a contractor requests a bid or performance bond.