If you are a contractor considering pursuing public works projects, a surety bonding relationship with an agency that specializes in surety bonds is essential. The surety bond agent is the liaison between the contractor and the surety bond company. As surety bond specialists, the agents at Surety1.com understand what the surety companies are looking for. The purpose of this post tis to explain some of the terms your agent will be discussing to qualify a contractor for maximum performance bond capacity. This post will concentrate on the Balance Sheet Basics for Bonding.
See our “What is a Surety Bond” Video.
See our “How does the Surety Bond Process Work” Video
What is a Balance Sheet?
A very basic financial statement will always include a balance. The balance sheet is nothing more than a list of the assets and a list of the liabilities. The total assets less the total labilities equals net worth. It is important for this to be a positive number. Net worth is a measure of the loss absorbing capacity of a company. Depending on the relative size of a contractor and the specific trade of a contractor, the surety will net worth to be at least 10 to 20% of the total construction work program. The work program is the cost to complete on all open jobs. As such, if that number is $500,000, the surety will be looking for a net worth (total assets – total liabilities) of $50,000 to $100,000.
The other key balance sheet basic the surety will be interested in is working capital. Working capital is total current assets less total current liabilities. Current Assets are, in the most basic terms, assets that will be converted into cash within the next 12 months. Examples of current assets include:
- Accounts Receivable
- Cash Equivalents
- Stock or Inventory
Examples of current liabilities include:
The surety company generally will be looking for a working capital to total work program of 5% to 10% or more. As such, if the cost to complete on all bonded open projects is $500,000, the surety will be looking for a working capital number (total current assets – total current liabilities) of $25,000 to $50,000.
This is a very simplistic explanation of the balance sheet basics. There are many other nuances to the composition of a balance sheet that explained here. For more information and to gain a better understanding of the entire performance bond underwriting process, contact a surety expert at Surety1.com, [email protected] or phone (877)654-2327.
Surety1.com is a service of AssuredPartners one of the largest and fastest growing insurance agencies in the nation. Representing over a dozen surety bond companies, Surety1.com is the premier online provider of surety bonds nationwide since 2003. Below is a list of other helpful performance and payment bond related posts.
What are Overbillings?
What is Profit Fade
Performance Bond Underwriting Guidelines
What are Underbillings
Performance and Payment Bond General Information Page
About the Author
John Page started his surety bond career in 1987. He was a vice president of a top ten surety bond company prior to founding Surety1.com in 2003.