{"id":100786,"date":"2022-11-28T01:57:42","date_gmt":"2022-11-28T06:57:42","guid":{"rendered":"https:\/\/sjcivil.com\/?p=100786"},"modified":"2024-04-02T02:41:54","modified_gmt":"2024-04-02T06:41:54","slug":"bonds-and-bonding-capacity-101","status":"publish","type":"post","link":"https:\/\/sjcivil.com\/bonds-and-bonding-capacity-101\/","title":{"rendered":"Bonds and Bonding Capacity 101"},"content":{"rendered":"<p><strong>Executive Summary.<\/strong>\u00a0If you\u2019ve ever wondered how bonding capacity is earned and calculated, it may be a bit fuzzier than you think. But it does rely on numbers. Read on for the basics.<\/p>\n<p><iframe loading=\"lazy\" style=\"border-radius: 12px;\" src=\"https:\/\/open.spotify.com\/embed\/episode\/3b3ZNkXvWKZrAN1KryF8oy?utm_source=generator\" width=\"100%\" height=\"152\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p><strong>What is bonding?<\/strong>\u00a0You\u2019ve heard people say \u201cThe job is bonded.\u201d or \u201cHow much can they bond?\u201d or \u201cThey\u2019ll call the bond\u201d. This begs the understanding of what exactly a bond is. A bond is an insurance. It\u2019s an insurance for, usually, a Project Owner. A bond is a piece of paper that says \u201cIf the contractor fails, the company named on this piece of paper will step in an fix all of the problems caused by the contractor.\u201d Usually that company named to fix the problem(s) is a name you\u2019ve heard: Liberty Mutual, Travelers, Hartford, Zurich, AIG, et cetera.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-102082 size-full\" src=\"https:\/\/sjcivil.com\/wp-content\/uploads\/2022\/11\/Insurance-768x512-1.jpg\" alt=\"\" width=\"768\" height=\"512\" srcset=\"https:\/\/sjcivil.com\/wp-content\/uploads\/2022\/11\/Insurance-768x512-1.jpg 768w, https:\/\/sjcivil.com\/wp-content\/uploads\/2022\/11\/Insurance-768x512-1-480x320.jpg 480w\" sizes=\"(min-width: 0px) and (max-width: 480px) 480px, (min-width: 481px) 768px, 100vw\" \/><\/p>\n<p>Let\u2019s just pick Liberty Mutual for my examples below.<\/p>\n<p><strong>What are the types of bonds in construction?<\/strong>\u00a0There are three common types of bonds in construction: bid bond, performance and payment bond, and labor and material bond. As stated above, if there is any problem with the bid, the contract performance or payment to subcontractors, or labor and material payments, Liberty Mutual will step in and hire a new general contractor and\/or make payments, or whatever cures the issue.<\/p>\n<p><strong>Is it like auto insurance?<\/strong>\u00a0If your question is \u201cSince bonding is an insurance, is there a deductible for the general contractor and certain rules on coverage?\u201d The answer: nope, not even close. There is no deductible. The Owner simply calls up Liberty Mutual and says \u201cMy project\u2019s general contractor is in trouble, please come out and fix my problem.\u201d The next step is Liberty Mutual places a call to the general contractor and if there is no immediate resolution, Liberty Mutual starts paying bills or hiring a new contractor, or both.<\/p>\n<p><strong>How do I get bonding?<\/strong>\u00a0There\u2019s a saying in the bonding world that bonding capacity is based on the Three C\u2019s: character, capacity, and capital. It\u2019s very true. Character will get you the initial meetings with the sureties (surety and bond are basically synonymous), capacity has to do with the controls a contractor has in place and if they can handle the additional work, and lastly capital is pretty much just cash.<\/p>\n<p><strong>How is bonding capacity calculated?<\/strong>\u00a0Once you have the character and capacity established as described in the prior paragraph, then it comes down to capital, or cash. It\u2019s a balance sheet calculation. A contractor\u2019s balance sheet is a financial document prepared by your accountant which shows the company\u2019s financial conditional at a moment in time. Below are Granite Construction\u2019s year over year balance sheets from Yahoo! Finance:<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-102081 size-full\" src=\"https:\/\/sjcivil.com\/wp-content\/uploads\/2022\/11\/image-7-1.png\" alt=\"\" width=\"763\" height=\"526\" srcset=\"https:\/\/sjcivil.com\/wp-content\/uploads\/2022\/11\/image-7-1.png 763w, https:\/\/sjcivil.com\/wp-content\/uploads\/2022\/11\/image-7-1-480x331.png 480w\" sizes=\"(min-width: 0px) and (max-width: 480px) 480px, (min-width: 481px) 763px, 100vw\" \/><\/p>\n<p>Bonding capacity as calculated by a surety is usually done in one of two ways: by working capital or by net worth.<\/p>\n<p>If by working capital, then the working capital is calculated and then multiplied by a number, like 10 or 20. So, taking the balance sheet above (and let\u2019s assume that the balance sheet is NOT in thousands), the working capital is calculated:<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-102080 size-full\" src=\"https:\/\/sjcivil.com\/wp-content\/uploads\/2022\/11\/image-9-1.png\" alt=\"\" width=\"821\" height=\"237\" srcset=\"https:\/\/sjcivil.com\/wp-content\/uploads\/2022\/11\/image-9-1.png 821w, https:\/\/sjcivil.com\/wp-content\/uploads\/2022\/11\/image-9-1-480x139.png 480w\" sizes=\"(min-width: 0px) and (max-width: 480px) 480px, (min-width: 481px) 821px, 100vw\" \/><\/p>\n<p>There is no exact science to any of this. The Three C\u2019s and the calculation above (the working capital, the multiplier of 15, et cetera) are all done on \u201cfeel\u201d by the surety based on your surety agent\u2019s opinion of you and his\/her ability to \u201csell you\u201d to the surety.<\/p>\n<p>If you do a net worth calculation (instead of the working capital one), the process is similar. Above, the net worth is Total Assets minus Total Liabilities, or $995,563. Again, another multiplier is chosen<\/p>\n<p><strong>How do I get bonding capacity for my new construction business?<\/strong>\u00a0If you\u2019re just starting out your construction business, it\u2019s pretty simple. You need to get an introduction to a surety agent and then you need to have cash. Cash solves a lot of problems.<\/p>\n<p><strong>My story.<\/strong>\u00a0I was a project manager for a growing construction business and I always talked with their surety agent. So, when I went out on my own I had a surety contact. Then I gathered money from my parents and my own savings account and threw it in a business bank account. Voila! Bonding capacity!<\/p>\n<p>Work Safe!<\/p>\n<p>&nbsp;<\/p>\n<div class=\"su-button-center\"><a href=\"https:\/\/sjcivil.com\/wp-content\/uploads\/2022\/11\/2022.11.26-Construction-Bonding-1.pdf\" class=\"su-button su-button-style-flat\" style=\"color:#FFFFFF;background-color:#293a57;border-color:#212f46;border-radius:12px;-moz-border-radius:12px;-webkit-border-radius:12px\" target=\"_blank\" rel=\"noopener noreferrer\"><span style=\"color:#FFFFFF;padding:0px 30px;font-size:22px;line-height:44px;border-color:#6a768a;border-radius:12px;-moz-border-radius:12px;-webkit-border-radius:12px;text-shadow:none;-moz-text-shadow:none;-webkit-text-shadow:none\"> Download The PDF<\/span><\/a><\/div>\n<span class=\"et_bloom_bottom_trigger\"><\/span>","protected":false},"excerpt":{"rendered":"<p>Executive Summary.\u00a0If you\u2019ve ever wondered how bonding capacity is earned and calculated, it may be a bit fuzzier than you think. But it does rely on numbers. Read on for the basics. What is bonding?\u00a0You\u2019ve heard people say \u201cThe job is bonded.\u201d or \u201cHow much can they bond?\u201d or \u201cThey\u2019ll call the bond\u201d. This begs [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":104725,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","iawp_total_views":78,"footnotes":""},"categories":[16,445,46,367],"tags":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v22.5 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Bonds and Bonding Capacity 101<\/title>\n<meta name=\"description\" content=\"If you\u2019ve ever wondered how bonding capacity is earned and calculated, it may be a bit fuzzier than you think. 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