How Construction Companies Can Increase Bonding Capacity

2025-04-02

Reading Time: 3 minutes 40 seconds

Driving growth and profitability means leveraging opportunities when they arise. This often means submitting proposals for larger and more complex projects in the construction industry. However, larger opportunities frequently require contractors to have the proper bonding capacity. Bonds provide project owners with assurance that the contractor has both financial stability and the capability to complete a project. Without adequate bonding, contractors can lose out on larger projects, leaving them “boxed in” to smaller projects, which could slow growth. For this reason, many construction companies are interested in learning how to increase bonding capacity.

What Is Bonding Capacity?

Bonding capacity sets the ceiling on how much surety credit a construction company can secure at any given time. Sureties establish two key limits: a single project limit, which sets the highest bond available for an individual contract, and an aggregate limit, which caps the total value of bonded work a company can manage at once. These limits significantly impact a contractor’s ability to compete for larger contracts, qualify for public-sector projects, and build credibility with project owners.

How Sureties Determine Bonding Capacity

Sureties conduct a thorough financial review before issuing or increasing bonding limits. They assess liquidity, working capital, profitability, and debt levels to gauge financial health. Companies with strong cash reserves and manageable debt levels present lower risk, while those with inconsistent cash flow or excessive liabilities may face bonding restrictions.

Beyond financials, past performance plays a critical role. Sureties look at project history, assessing whether the contractor completes jobs on time, within budget, and without disputes. Delays, cost overruns, and legal claims can raise concerns, even for financially stable contractors.

Backlog management is also important. Contractors that take on too many bonded projects at once may appear financially stretched, limiting their ability to secure additional bonding. A well-managed backlog signals stability, showing that a company can scale responsibly without overextending resources.

Getting Started: Key Financial Statement Ratios

Contractors preparing to secure a bond or increase their bonding capacity should regularly evaluate these key financial ratios:

• Current Ratio: Measures liquidity and ability to cover short-term obligations.
• Debt-to-Equity Ratio: Indicates financial leverage and risk level.
• Net Worth-to-Revenue Ratio: Assesses financial strength relative to revenue.
• Working Capital Ratio: Reflects short-term financial health and cash flow flexibility.
• Backlog-to-Working Capital Ratio: Helps sureties assess workload capacity and risk of overextension.

Understanding these financial metrics and working with a CPA to strengthen underperforming areas can improve bonding prospects.

Strategies to Increase Bonding Capacity

• Strengthen Financial Management — Sureties prioritize contractors with steady cash flow, low debt, and strong working capital. This applies to both the business and the personal financial standing of ownership. Increasing cash reserves, reducing short-term liabilities, and limiting reliance on credit can improve financial standing while streamlining accounts receivable and lowering Days Sales Outstanding (DSO) helps maintain cash flow.
• Provide Reviewed or Audited Financial Statements – For contractors that have not had independent CPA reviewed or audited financial statements, having an outside firm specializing in construction contractors perform a review or an audit provides sureties with additional confidence and transparency in the company’s financial operations and equity position. In turn, this should generally result in higher overall aggregate bonding capacity limits and higher single-project bonding limits.
• Build a Strong Track Record — A history of delivering projects on time and within budget strengthens a contractor’s credibility. Keeping detailed records — timelines, budgets, and client references — demonstrates reliability, while effective backlog management prevents financial strain. Contractors with a well-documented record of successful projects are more likely to qualify for higher bonding limits.
• Diversify Project Types & Revenue Streams — A diverse portfolio reduces risk and improves bonding potential. Government contracts, which often require bonding, boosts credibility, helps balance private and public work, and contributes to more stable revenue. Successfully managing lump-sum, design-build, and cost-plus contracts demonstrates adaptability and strengthens a contractor’s case for increased bonding capacity.
• Improve Risk Management & Internal Controls — Sureties look for contractors with strong risk management practices to prevent cost overruns and disputes. Construction management software helps track costs and change orders, and well-structured contracts define project scope and payment terms to minimize claims. Strong financial controls further reduce risk, reinforcing a contractor’s ability to manage larger projects.
• Invest in People and Technology — A skilled workforce and the right technology can improve operational efficiency and financial stability. Experienced estimators, project managers, and financial professionals demonstrate effective project oversight, while job costing software, cash flow forecasting, and automated billing improve accuracy and decision-making. Companies that invest in leadership and efficiency are better positioned for sustainable growth and higher bonding limits.
• Explore Alternative Bonding Options — When traditional bonding limits don’t increase fast enough, alternative solutions can help. The SBA Surety Bond Guarantee Program assists smaller contractors in qualifying for bid, performance, and payment bonds. Other options include joint ventures with bonded firms or securing a letter of credit, which some private-sector project owners accept in place of a bond.

Contact Us

Increasing bonding capacity requires proactive financial management, project diversification, and internal efficiency improvements. Taking these steps now will position your company for larger projects and long-term success. If you have questions about the information outlined above or need assistance with another tax or accounting issue, JLK Rosenberger can help. For additional information, call 949-860-9902 or click here to contact us. We look forward to speaking with you soon.