Increasing Bonding Capacity: What Construction Companies Need to Know

For many Denver and Colorado construction companies looking to bid on larger projects having the appropriate level of bonding is essential. A high level of capacity indicates to the project owner that a bidder has financial stability and a proven track record of completing projects of various sizes. This means the higher the bonding capacity the larger the project a company can bid on. In other words, bonding capacity can be the difference between winning a major contract or missing out on a significant opportunity. For those interested in increasing capacity there are several steps which can be taken. To help clients, prospects, and others, WhippleWood CPAs has provided a summary of the key details below.

What Is Bonding Capacity?

Bonding capacity refers to the maximum amount of surety bonds a construction company can obtain. These bonds act as a financial guarantee that a contractor will complete a project according to the contract terms. It’s common practice in both public and private sectors to help minimize risk to the project owners.

Sureties determine bonding capacity by evaluating a company’s financial health, project history, and ability to manage risk. Bonding limits are typically expressed in two ways:

• Single limit: The maximum bond amount for an individual project.
• Aggregate limit: The total bonded work a company can take on at one time.

A contractor’s bonding capacity can increase, or decrease based on business performance. For example, a growing contractor wanted to bid on larger projects but found the bonding limit wasn’t keeping pace. The surety flagged concerns about working capital, which had remained flat despite rising revenue. By retaining more earnings in the business and tightening cash flow management, the contractor improved financial stability. After a review, the surety increased the bond limit, which allowed the company to take on bigger projects.

Key Financial Metrics

Sureties often conduct a detailed financial review before determining bonding limits. Three key financial metrics play a major role in this evaluation:

• Working capital Working capital is the difference between current assets (cash, receivables, inventory) and current liabilities (short-term debt, payables). A company with strong working capital can cover day-to-day expenses and absorb unexpected costs. Sureties generally look at the working capital ratio along with several other measurements of financial health.
• Net worth is the company’s total assets minus liabilities. A higher net worth reassures sureties that a contractor has the financial cushion to withstand economic downturns, supply chain disruptions, or unexpected project costs.
• Cash flow measures how money moves in and out of the business. Even profitable companies can struggle if cash flow is inconsistent, especially with many contractors reporting delayed payments. Sureties look at whether a contractor has enough cash to cover payroll, material costs, and other expenses. Contractors can usually improve cash flow by improving accounts receivable (AR) processes and monitoring expenses closely.

How to Increase Bonding Capacity

Finances are a key factor, but sureties also look at a company’s operational efficiency, risk management, and project history. The following strategies can help contractors secure higher bond limits:

Strengthen Financials — Contractors often start this process by reviewing key financial ratios with a professional. Sureties favor companies with CPA-prepared financial statements, healthy working capital, and manageable debt. Retaining earnings in the business, paying down short-term debt, and reducing overhead costs can help reduce risk.

Manage Backlog — Taking on too many projects at once can overwhelm resources, leading to cost overruns and delays. A steady backlog with reasonable profit margins is more attractive than rapid, unsustainable expansion.

Build a Strong Credit Profile — A solid credit history reassures sureties that a contractor can meet financial obligations. Paying bills on time, reducing outstanding debt, and monitoring both business and personal credit scores can be helpful to the process.

Improve Risk Management — Sureties want to see robust internal controls, including WIP reports, budgeting, cash flow forecasting, compliance, and safety programs. Financial and operational controls show that a contractor can manage projects effectively and mitigate risk.

Demonstrate a Strong Track Record — A company with a history of successful project completion, minimal disputes, and strong relationships with clients and suppliers is more likely to receive higher bonding limits. It’s important to maintain accurate records of completed projects to strengthen the case.

Diversify Project Experience — Expanding into different types of projects can reduce financial risk. Contractors looking to increase bonding capacity may consider branching into municipal, commercial, or infrastructure projects to demonstrate adaptability.

Plan Ahead — Increasing bonding capacity isn’t an overnight process. Contractors expecting to bid on larger projects in the next 12-18 months will want to start preparing now.

Action Steps

Here are some key steps contractors can take to improve financial standing and qualify for larger bonds:

• Review financials with a CPA to ensure statements are accurate and highlight working capital.
• Retain earnings in the business instead of taking large distributions to improve liquidity.
• Reduce short-term debt and avoid unnecessary financial obligations.
• Improve job costing and cash flow forecasting to demonstrate strong financial oversight.
• Track and document project success to show a history of on-time, on-budget completions.
• Communicate with stakeholders to align expected bonding capacity with business growth.

Contact Us

A higher bonding capacity can make a difference in the long-term success of a construction company, opening the door to larger and more profitable projects. Being proactive is often the first step. If you have questions about the information outlined above or need assistance with another tax or accounting issue, WhippleWood CPAs can help. For additional information call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.