Maximizing Bonding Capacity

By Matt Leskanic, M.SAME, and Greg Angel, CPA, M.SAME

Transitioning from a fast-track program to a standard program can increase bonding capacity and enable small businesses to secure larger government contracts.

Emerging contractors may feel like it is a constant uphill battle when bidding on federal projects. However, there are ways small businesses can strengthen their position to be more competitive and secure larger government contracts. A significant opportunity is to upgrade bonding capacity from a fast-track program to a standard program. A standard program provides contractors financial credibility, access to a broader range of government opportunities, and substantial cost savings.

Program Differences

Fast-track programs are suitable for small, infrequent, or one-off construction performance and payment bonds under $500,000. This simple process only requires the applicant’s credit, with the surety company approving within 24 hours. Bonds exceeding $500,000, however, need larger or standard bond programs. This involves more detailed financial information from the applicant. The surety must be satisfied that the contractor can meet both current and future obligations. The reputation of the contractor also will be evaluated, along with its previous experience, the size of work staff, equipment, and the processes in place that are necessary to perform the work.

Unlike a fast-track program, a standard program will enable contractors to take on larger government projects that require construction bonds, bid bonds, payment and performance bonds, or supply bonds. Under the Miller Act, construction bonds are a requirement for contractors providing services on federal projects over $100,000. Similarly, each state has its own “Little Miller Act” specifying the contract amount above which construction bonds are required. Another benefit of establishing a standard program is the potential for sizeable cost savings. Fast-track bonds often come with higher premium rates, varying limits, and aggregate terms, compared with lower rates on standard programs.

Unlike a fast-track program, a standard program will enable contractors to take on larger government projects that require construction bonds, bid bonds, payment and performance bonds, or supply bonds.

Successfully Transitioning

To successfully transition from a fast-track to a standard bond program as a federal contractor, follow a series of essential steps.

Collaborate with expert surety agents and financial advisors. Build a strong connection with a knowledgeable surety agent specializing in construction bonds, with access to various surety markets suitable for federal needs. The agent can negotiate the best programs and rates on the contractor’s behalf and act as an advocate during both prosperous and challenging situations. Additionally, the surety agent will have a trusted network of industry partners and can offer recommendations.

Enhance financial statement presentation. Prepare a CPA financial statement, specifically a CPA review. While this may incur additional expenses, the savings from a reduced bond rate usually offsets this. Additionally, the surety will anticipate financial statements to be organized based on a percentage-of-completion basis, which offers a more precise financial picture. This will help the contractor maximize surety capacity on the single and aggregate basis.

Strengthen the balance sheet. Increase working capital and net worth by retaining profits in the company. A solid balance sheet shows financial strength and capacity to support a bond program.

Establish a bank line of credit. Qualifying for the largest possible line of credit enhances bonding capacity. Having access to liquidity, even if gone unused, can reduce risk in the eyes of the surety. This bank line helps improve the capital base and increase single and aggregate bonding limits.

Demonstrate internal controls. Having evidence of robust internal control systems reflects your efficiency and reliability. Clear protocols, documented site inspections, change orders, contracts, insurance policies, safety rules, and employee incentives all contribute to enhancing the surety’s trust in the company.

Provide comprehensive job information. Complete bond request forms in their entirety and provide the necessary job information accurately and promptly.

Navigating Federal Contracting

For small and emerging federal contractors, the upgrade to a standard bond program can be a game-changer. It offers a strategic path to navigate complexities while enhancing competitiveness, providing financial stability, and giving access to more capacity. While requiring a more comprehensive application process, the benefit of securing federal work in the pipeline, improved cost savings, and better profit margins make the transition worth it.

Matt Leskanic, is Vice President and Greg Angel, CPA, is Vice President, Surety Bond Professionals. They can be reached at matt@suretybondprofessionals.com; and greg@suretybondprofessionals.com.

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