How to get bonded as a contractor

Most contractors meet surety bonding the same way. A project worth chasing shows up, and the invitation to bid says a bid bond is due Thursday. The scramble that follows is avoidable, because the slow part is not the bond. It is the file behind the bond.

Here is what bonding is, what an underwriter looks at, and the order the steps actually happen in.

A surety bond is credit, not insurance

Insurance protects you against a loss you suffer. A surety bond protects the project owner against your failure to perform. If the surety pays a claim, you repay the surety.

That one difference drives everything else. The surety is extending you credit against your ability to finish the work, so it reads your balance sheet and your track record the way a bank reads a borrower. Contractors who expect an insurance quote get surprised by the document list. Contractors who expect a credit application do not.

Three parties sign into every bond:

• The principal. You, the contractor doing the work.
• The obligee. The project owner requiring the bond.
• The surety. The company backing the guarantee.

The bonds you get asked for

Four things come up, and only three of them are bonds.

• A bid bond goes in with your bid. It guarantees that if you win, you sign at your bid price and produce the other bonds.
• A performance bond guarantees the work gets finished according to the contract.
• A payment bond guarantees your subcontractors and suppliers get paid.
• A bonding line is not a bond. It is the approved capacity you pull individual bonds from.

The bonding line is the part contractors miss. You do not apply from scratch for every bond forever. You get approved once, then draw bonds project by project. The first approval is the work. Everything after it is a transaction.

What to have ready before you apply

Gather these before a bid is on the clock:

• Business financial statements
• An overview of the jobs you have completed, including their sizes
• Detailed bid or contract information for the job in front of you

If you have open jobs, sureties commonly ask for a work in progress schedule showing contract value, cost to date, billings, and remaining cost on each one. Have it built before you need it. Assembling it under bid pressure is where mistakes get in.

How an underwriter reads the file

CapStream underwrites on four things: your contracting experience, your company ownership, your financials, and the largest jobs you have completed.

That last one carries more weight than most contractors expect. The biggest job you have finished sets the size the surety believes you can absorb. A contractor with clean financials and a $400,000 largest job is a different file from a contractor with the same financials and a $3 million largest job, and the bonding capacity follows.

Your financials answer a narrower question than you might think. The underwriter wants to know whether you have the working capital to carry the job while you wait to get paid, and whether your open backlog already spoken for leaves room for one more project.

The steps, in order

1. Build the file. Assemble the documents above. This is the step that determines your timeline.
2. Request a bonding line. One set of details, one submission. The four step CapStream process covers what you send and what comes back.
3. Pull a bid bond when you bid. Once you are approved, bid bonds issue as fast as 1 hour. Send the bid details and an estimated job cost breakdown.
4. Convert to performance and payment bonds on award. These issue together, as fast as same day.
5. Draw mobilization funding for upfront costs. Mobilization funding up to 20% of the contract price covers bond premiums, materials, and equipment rentals before the project starts.

What bonding costs

Premium is a percentage of the bond amount. The rate moves with your financial strength, your experience, the size of the job, and the type of bond.

Performance and payment bonds are issued together under one premium, which typically runs 1 to 3 percent of the contract value. Bid bonds are priced separately and are the cheaper of the two events.

Two pages go deeper: what drives contractor bond pricing and the bid bond calculator, which estimates the bond amount and premium from your contract value.

One timing note worth knowing. Bond premiums are an upfront project cost, so they can come out of mobilization funding proceeds rather than your own cash.

If you have no bonding history

A first bond is the hardest bond. The Small Business Administration built a program for exactly this problem.

Under the SBA Surety Bond Guarantee Program, the SBA guarantees a share of the surety's loss, which lets sureties write contractors they would otherwise turn down. The guarantee is 90 percent on contracts up to $100,000, and on contracts awarded to economically disadvantaged small businesses, HUBZone businesses, 8(a) businesses, and veteran-owned small businesses. It is 80 percent on other contracts.

Guaranteed bonds run up to $9 million, and up to $14 million on federal contracts when a federal contracting officer certifies that the guarantee is in the government's interest. The fee is 0.6 percent of the contract price on performance and payment bond guarantees. Bid bond guarantees carry no fee.

The SBA Surety Bond Guarantee Program page covers who qualifies and how CapStream layers a financing commitment on top of the guarantee.

How long the whole thing takes

Once you are approved, a bid bond can be issued as fast as 1 hour and performance and payment bonds as fast as same day. Turnaround depends on complete information and underwriting review. The variable is the approval before that, and the variable inside the approval is how complete your file is on day one.

Start the conversation when you decide to pursue bonded work, not when a bid date appears. CapStream writes bonds up to $10 million with no minimum, and requesting a bond does not affect your credit.