What a surety is actually underwriting: your ability to finish, and to pay it back
A bonding company is not insuring the project owner against your failure; it is guaranteeing your performance and expecting you to repay every dollar it ever pays out. That is why the underwriting looks like a credit decision rather than an insurance quote. Sureties talk about three things: character, meaning your track record, reputation and how you have handled trouble before; capacity, meaning whether you have the people, equipment, systems and experience to complete the work you are bidding; and capital, meaning whether the balance sheet can absorb a bad job without the surety being called. The financial statements carry most of the third and a surprising amount of the second, because a contractor's statements show how well the business estimates, bills and collects.
Behind every bond sits a general indemnity agreement signed by the company, by the principals personally and usually by related companies. The surety reads your statements to decide how much exposure it is willing to take against that indemnity, expressed as a single-job limit and an aggregate program. Both numbers are recalculated when new statements arrive, which is why the statements are not a formality; they are the annual renegotiation of your capacity to bid.
Which level of statement, and why the surety cares who prepared it
The assurance level a surety requires rises with the program size. At the small end, for modest single-job limits, most sureties accept a compilation engagement, prepared by a CPA under the compilation standard with a compilation engagement report and a note describing the basis of accounting, provided the contract schedules are attached and the accounting method is percentage of completion. As single-job and aggregate limits grow, the surety wants a review engagement, where the CPA provides limited assurance that the statements are free of material misstatement. Above that, for the largest programs and much public work, the requirement becomes an audit. Each surety sets its own thresholds, and they move with the market, so ask your broker where the lines sit before year-end rather than after.
Two things get statements rejected regardless of level. The first is the completed-contract method, which recognises revenue only when a job finishes and tells a surety nothing about the jobs in progress, which are the ones it is bonding. The second is statements prepared without the contract schedules, or with schedules that do not tie to the balance sheet. A review engagement with a clean WIP schedule tells a surety more than an audit that treats construction revenue like retail sales. If you are choosing between spending on assurance level and spending on getting the job costing right, the job costing comes first, because the schedules are what the assurance is being given on. At the small end of the market, our compilation engagement work is built around the schedules a surety will actually read.
The schedules a surety reads before it reads anything else
An underwriter goes to the contract schedules before the income statement, because the income statement is the sum of the schedules and the schedules show where the sum came from.
| Schedule | What it shows | What the surety is looking for |
|---|---|---|
| Contracts in progress | Each open job: contract price, estimated total cost, costs to date, percent complete, revenue earned, billings to date, gross profit to date and at completion | Whether estimated margins are holding, whether the totals tie to the balance sheet, and whether any job is heading for a loss that has not been booked |
| Completed contracts | Each job finished in the year: original estimated margin against final margin | Estimating accuracy. Profit that fades between bid and completion, job after job, is the most reliable warning sign in the industry |
| Over-billings | Billings in excess of costs and estimated earnings, shown as a current liability | Normal in moderation; large balances mean the cash from front-loaded billing is already spent on work still to be done |
| Under-billings | Costs and estimated earnings in excess of billings, shown as a current asset | Unapproved change orders, claims, or cost overruns nobody has admitted to yet. Every large under-billing gets a question |
| Backlog | Uncompleted contract value and the gross profit remaining in it | Whether the company has enough profitable work signed to carry its overhead, and whether the backlog exceeds what its capital can support |
| Holdbacks receivable and payable | Amounts held under the Construction Act, by job, with expected release | How much of the receivable balance is locked in lien periods, and whether old holdbacks are really collectible |
| Related-party balances | Loans to shareholders, the holdco, the equipment company or family | Money that has left the business; the surety deducts it from working capital and net worth unless it is repaid or subordinated |
| Equipment and debt | Fleet at cost and net book value, loans and leases with current portions and lease commitments | Equity in the fleet, how much debt comes due within a year, and whether lease commitments are disclosed |
The contracts-in-progress schedule is the one to get right first, because everything else is checked against it. Its totals for costs, revenue, over-billings and under-billings must agree to the balance sheet and income statement to the dollar, and its estimated costs to complete must be the project managers' current numbers, not the original bid. A schedule that still shows bid margins on a job everyone on site knows has gone wrong is the fastest way to lose a surety's trust, because they will find out on the next job.
Working capital and net worth, the surety's way
A surety does not use the working capital figure on your balance sheet; it computes its own, and the adjustments are where most contractors are surprised. Starting from current assets less current liabilities, an underwriter typically removes or discounts receivables from related parties and shareholders, prepaid expenses, inventory that is not readily saleable, and receivables that are old or in dispute. Under-billings are often discounted, because they represent revenue a customer has not yet agreed to. Holdbacks receivable are counted, but old ones may be moved out of current. On the liability side, the current portion of equipment loans and any due-to-shareholder balance that could be called stay in. The result is adjusted working capital, and it is smaller than yours.
Net worth gets the same treatment. Shareholder loans receivable, goodwill and intangible balances come out; equity in equipment may be added back at appraised value where the surety is confident of it. A holdco loan that the surety would otherwise deduct can be turned into quasi-equity if it is formally subordinated to the surety under a postponement agreement. The single-job and aggregate limits then come out as multiples of adjusted working capital and adjusted net worth, so a dollar that moves out of the operating company to a related company reduces capacity by many times its size. The ratios the surety computes, working capital to backlog, debt to equity, under-billings to equity, are read as trends across three years rather than as a single-year snapshot.
This is the number to manage during the year, not after it. A dividend or a shareholder draw in the final month of the fiscal year lands on the balance sheet the surety will read, and it can convert a strong year into a weaker line. So can a large equipment purchase financed on a short amortisation, which loads current liabilities. That is one reason the lease-or-finance decision for a bonded contractor is a bonding decision as much as a tax one, and it is covered in lease or finance for a contractor's equipment.
Timing, and how a good year still shrinks the line
Sureties want fiscal year-end statements within about 90 days of the year-end, and most want interim statements at least at the half-year, with an updated contracts-in-progress schedule attached to each. A late year-end is treated as a signal. The program is often frozen at the previous limits, or trimmed, until the statements arrive, and a contractor bidding in the spring on last year's numbers can lose work it could have bonded. The 90 days are shorter than they sound when the year-end schedule depends on project managers updating their cost-to-complete estimates, so the schedule work should start before the year-end, not after the bookkeeping is closed.
A profitable year can still shrink the line, and the reasons are usually visible in the schedules. Profit fade on completed contracts, even in a year that ended in the black. Under-billings that grew faster than revenue. A large related-party receivable that appeared when the new holdco or equipment company was set up and the intercompany accounts were never settled. Over-billings that funded the owner's draws. A compilation where the program now needs a review. Any of these can cut capacity in a year the income statement looked fine, because the surety is underwriting the next job, not the last one.
Groups with more than one company get one more layer. The surety will want to see the related companies together, on a combined basis or with each set of statements and the intercompany balances reconciled, so that rent, management fees and loans between them can be traced. That preparation is close to what a bank asks for when it reviews a group, and the method is in how to prepare a multi-entity group for a lender review. The holdback figures in every schedule also depend on getting their tax and HST timing right in the books first, which is covered in when tax and HST are due on construction holdbacks.
What changes the answer
How much of this your statements need, and how much the surety will give you for them, turns on a handful of facts:
- Program size: the single-job and aggregate limits you need decide the assurance level and the depth of schedules.
- Your estimating record, read from the completed-contracts schedule across three years.
- Related-party balances, and whether they can be repaid or subordinated before year-end.
- Owner draws and dividends in the last months of the year, which land on the balance sheet the surety reads.
- Fleet and debt structure, including how much equipment debt comes due within twelve months.
- Whether the WIP schedule is a management tool or a year-end reconstruction, because the surety can tell the difference.
The contractors who get the most capacity for their capital are the ones whose contracts-in-progress schedule is updated monthly, so the year-end statements are a summary of numbers management already knows. That is the rhythm we run inside CFO services for general contractors: job costing tied to the general ledger, a monthly WIP review with the project managers, and year-end statements delivered inside the surety's window. If your bonding line was trimmed at the last renewal and you are not sure why, a free 15-minute discovery call is usually enough to find the schedule that caused it.
