For contractors, securing a surety bond is often an essential step in participating in public or private construction projects. The bonding capacity represents the maximum amount of surety credit that a contractor can obtain. A higher bonding capacity can enable contractors to bid on more significant projects, potentially leading to increased revenue and growth. This article explores five strategies that contractors can employ to enhance their bonding capacity.
- Improve Financial Management
A contractor's financial stability is a primary factor in determining their bonding capacity. Surety companies will closely examine financial statements to assess the contractor's creditworthiness, profitability, and solvency. To improve bonding capacity, contractors should:
- Maintain accurate and up-to-date financial records.
- Focus on increasing profitability by reducing overhead expenses and improving cost management.
- Maintain healthy cash flow and ensure access to working capital.
- Maintain a line of credit but keep debt levels manageable.
- Grow cash balances to strengthen your balance sheet.
- Develop a Strong Track Record
Contractors with a proven history of successful project completion and satisfied clients are more likely to receive favorable bonding terms. To build a strong track record, contractors should:
- Complete projects on time and within budget, ensuring that quality standards are met.
- Cultivate positive relationships with clients, subcontractors, and suppliers.
- Obtain and maintain necessary licenses and certifications.
- Keep accurate records of all completed projects, including client testimonials and references.
- Choose the Right Surety Partner
Working with a reputable surety company or agent can significantly impact a contractor's bonding capacity. A good surety partner will:
- Understand the contractor's industry and business model.
- Offer guidance and support in improving the contractor's financial and operational performance.
- Advocate for the contractor and negotiate favorable bonding terms with underwriters.
- Help the contractor maintain a positive relationship with the surety company by facilitating open communication and addressing any concerns.
- Strengthen Management and Operational Systems
A well-managed and organized contractor is more likely to receive higher bonding capacity. Implementing strong management and operational systems can demonstrate to surety companies that the contractor is reliable and capable of handling large projects. Contractors should:
- Create and maintain a comprehensive business plan, outlining short-term and long-term goals, strategies, and risk management.
- Implement effective project management systems, such as scheduling, budgeting, and progress tracking tools.
- Develop a skilled and experienced management team, with clearly defined roles, responsibilities, and succession plans.
- Establish quality control and safety procedures to minimize risks and protect against potential losses.
- Build Relationships with Industry Professionals
Networking with industry professionals can help contractors increase their visibility and credibility, leading to a higher bonding capacity. Contractors should:
- Attend industry events, such as conferences, seminars, and trade shows, to connect with peers, clients, and suppliers.
- Join industry associations and participate in local chapters to stay informed about industry trends and best practices.
- Establish relationships with financial institutions, such as banks and credit unions, to improve access to credit and financial services.
- Collaborate with other contractors, forming joint ventures or partnerships when appropriate to share resources, expertise, and risks.
Increasing bonding capacity is essential for contractors looking to expand their business and take on larger projects. By focusing on improving financial management, building a strong track record, selecting the right surety partner, strengthening management and operational systems, and networking with industry professionals, contractors can successfully boost their bonding capacity and unlock new opportunities for growth.
The Mahoney Group, based in Mesa, Ariz., is one of the largest independent insurance and employee benefits brokerages in the U.S. An employee-owned organization, we’ve been providing our clients with the confidence to face whatever lies ahead for more than 100 years. For more information, contact us online or call 877-440-3304.
This article is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.