Bid & Performance Bonds for Large Contractors: Is Your Surety Ready?
Pursuing larger projects? Learn how bid, performance and payment bonds work—and why your surety relationship matters as your construction business grows.
Winning larger construction projects can be a major step forward for a contractor. It can also expose a weakness that may have gone unnoticed for years: bonding capacity.
A contractor may have successfully obtained $500,000 or $1 million bonds for years, only to discover that securing a $3 million, $5 million or $10 million project requires a very different approach.
The issue isn’t simply whether a surety will write the bond. The bigger question is whether your overall bonding program is positioned to support where your company is going.
Your Next Project May Require More Than a Bid Bond
Many contractors think about bonding one project at a time. However, experienced contractors know that the real issue is capacity.
A contractor bidding a $5 million project may need a bid bond today, followed by a performance bond and payment bond if awarded the contract. At the same time, the contractor may already have several other bonded projects underway.
That makes aggregate bonding capacity extremely important.
For example, a contractor might technically qualify for a $5 million performance bond but have limited ability to take on another significant bonded project because of existing work in progress.
A good surety strategy looks beyond the next bid and considers the contractor’s entire backlog and future plans.
What Does a Surety Look At?
Sureties evaluate contractors differently than a typical insurance carrier evaluates an insurance account.
Financial strength is obviously important, but it is only part of the picture.
Depending on the size and complexity of the program, a surety may evaluate:
- Working capital
- Net worth
- Profitability and financial trends
- Current and projected backlog
- Quality of accounting and financial reporting
- Experience with similar projects
- Work-in-progress information
- Banking relationships
- Management experience
- Existing indemnity obligations
- Previous bonding history
- The contractor’s ability to successfully complete larger projects
The stronger and more organized the contractor’s financial information, the easier it can be for a surety to understand the account and determine appropriate capacity.
Bid Bonds Are Only the Beginning
A bid bond provides assurance to the project owner that the contractor will honor its bid and, if awarded the contract, proceed with the required contract and bonding obligations.
If the contractor wins the project, the owner may then require a performance bond and payment bond.
The performance bond generally protects the obligee against certain failures of the contractor to perform the bonded contract.
The payment bond generally provides protection related to payment obligations to certain subcontractors, laborers and suppliers, depending on the contract and applicable law.
For contractors pursuing larger public and private projects, these bonds can be a fundamental part of the ability to compete for work.
The Problem With Waiting Until the Bid Is Due
One of the biggest mistakes a growing contractor can make is waiting until a large project is ready to bid before discussing bonding requirements.
If the contractor needs substantially more capacity than its existing surety relationship can support, there may not be enough time to solve the problem.
A better approach is to work with your insurance and surety professional before the opportunity arrives.
That allows time to review financials, backlog, current obligations and the contractor’s growth plans.
It also gives the surety an opportunity to become familiar with the business before a large bond request lands on the desk.
Your Surety Relationship Should Grow With Your Business
A contractor’s bonding program shouldn’t remain static while the company grows.
If your company has moved from $1 million projects to $5 million projects, your surety relationship should reflect that growth.
The same is true if you are:
- Expanding into public construction
- Pursuing larger general construction projects
- Taking on larger subcontracting opportunities
- Increasing your annual volume
- Building a larger backlog
- Entering new geographic markets
- Pursuing government contracts
- Competing for projects with significant bonding requirements
These changes can materially affect the bonding strategy that makes sense for your company.
Insurance and Surety Shouldn’t Be Treated as Completely Separate
For a contractor, bonding is only one part of the overall risk-management program.
General liability, workers’ compensation, commercial auto, equipment, umbrella or excess liability and other coverages all need to support the company’s operations.
As contractors grow, the insurance program often needs to grow with them.
That is why having an advisor who understands both the insurance and surety sides of the construction business can be valuable.
The goal isn’t simply to obtain the bond required for today’s project. It’s to build a program that helps position the contractor for tomorrow’s opportunities.
Are You Ready for Your Next Large Project?
If you’re an established contractor pursuing larger projects, now may be the right time to evaluate your bonding capacity—not when the bid deadline is approaching.
At Frost Insurance Agency, we work with contractors on bid bonds, performance bonds, payment bonds and their broader insurance programs.
Whether you need a bond for an upcoming bid or want to understand how much additional bonding capacity your company may be able to develop, we can help evaluate your current position and identify the information a surety will need.
Don’t wait until you have the project in hand to find out whether you can bond it.
Planning to Bid a Larger Project?
Contact Frost Insurance Agency for a bonding review or bid bond quote.
Let’s make sure your surety program is ready for the opportunities you’re pursuing.