Public work in California is bonded work. The day a contractor decides to bid a school, a city street or a water district project, three new documents appear in the bid package, and a surety company becomes the gatekeeper to the revenue. This is what those bonds are, what the surety is actually deciding, and how contractors move their limits up.
The three bonds
- Bid bond: guarantees that if you are the low bidder you will sign the contract and provide the performance and payment bonds. Typically 10% of the bid amount. If you walk away, the owner can claim the difference between your bid and the next one, up to the bond.
- Performance bond: guarantees the contract will be completed per the plans and specifications. Usually written at 100% of the contract price. If you default, the surety arranges completion and then looks to you for repayment.
- Payment bond: guarantees your subcontractors and suppliers get paid. On California public works, a payment bond is required by statute on contracts above a modest threshold, and it is what protects the public entity from stop notices and liens it cannot otherwise be subject to.
These are not insurance. Insurance expects losses and prices them in. A surety expects zero losses and, if it pays one, expects you to pay it back under the indemnity agreement you and usually your spouse signed. That difference explains everything about how bonding is underwritten.
What the surety is deciding
Surety underwriters talk about the three Cs, and every document they ask for maps to one of them:
- Capital: your balance sheet. Working capital and net worth set the ceiling. A common rule of thumb ties the aggregate program to a multiple of working capital, so a contractor with $500,000 in working capital will be looked at very differently from one with $2 million, even at the same revenue.
- Capacity: can you actually build this? Largest jobs completed, the resume of your project managers and superintendents, equipment, and your current backlog. Sureties resist a single job that is a big multiple of the largest one you have finished.
- Character: how you have treated subs, suppliers, owners and lenders. References, credit history, and how you have handled the disputes every contractor eventually has.
The paperwork that moves your limit
Contractors often hear “we can’t get you there” when the real problem is the quality of the financial presentation. The single biggest step up in capacity usually comes from the financial statements:
- Internally prepared statements support small programs
- A CPA-reviewed statement on a percentage-of-completion basis unlocks mid-sized programs
- A CPA-audited statement is the entry ticket for larger single jobs and for the surety markets that write them
Alongside the year-end statement, sureties want a current interim statement, a work-in-progress schedule showing every open job’s contract value, cost to date, estimated cost to complete and billings, an aged receivables and payables report, a bank line of credit letter, and a personal financial statement from the owners. A clean WIP schedule that reconciles to the income statement does more for your limit than any cover letter.
Single and aggregate limits
A bond program has two numbers: the largest single job the surety will bond, and the total of all bonded work you can have open at once. Backlog eats the aggregate. A contractor with a $5 million single and $15 million aggregate who already has $12 million bonded and open can only take a $3 million job, regardless of the single limit. Managing your backlog and closing out finished jobs, so the surety releases the exposure, is part of running a bonded business.
Practical steps if you are starting out
- Bond a few smaller private jobs first, even when the owner does not require it, to build a track record
- Move to percentage-of-completion accounting with a construction CPA before you need the larger program, not after
- Keep working capital in the business. Distributions that strip the balance sheet at year end reduce capacity the following year.
- Ask about the federal Small Business Administration surety bond guarantee program if your financials are thin but your capability is real
Where insurance and surety meet
Sureties review your insurance program as part of capacity, and public owners require the bonds and the insurance certificates together at contract signing. Contractors who handle both through one broker avoid the week-of-award scramble. We place bonds alongside the liability, auto, workers’ comp and umbrella program, issue the certificates instantly from the portal, and prepare the surety submission with your CPA. If you are planning to bid public work in the next year, start the conversation now. Capacity is built before the bid, not at it.
Common questions
What is the difference between a bid bond, a performance bond and a payment bond?
A bid bond, typically 10% of the bid, guarantees you will sign the contract and provide the other bonds if you win. A performance bond, usually 100% of the contract price, guarantees the work is completed per the plans. A payment bond guarantees subcontractors and suppliers are paid and is required by statute on California public works above a modest contract threshold.
What do surety companies look at to set a contractor’s bonding capacity?
Capital (working capital and net worth from your financial statements), capacity (the largest jobs you have completed, your key people, equipment and current backlog) and character (references, credit history and how you have handled disputes). Financial statement quality matters most: CPA-reviewed statements on a percentage-of-completion basis support mid-sized programs and audited statements unlock larger single jobs.
How can a contractor increase single and aggregate bond limits?
Upgrade to CPA-reviewed or audited percentage-of-completion financials, maintain a clean work-in-progress schedule that reconciles to the income statement, keep working capital in the business rather than distributing it, close out finished jobs so the surety releases exposure, and build a track record by bonding smaller jobs first.