If you want to work on commercial, government, or institutional projects, you'll need bonding. Bonds are essentially a third-party guarantee that you'll complete your work and pay your bills. Without them, the largest and most profitable projects are off-limits.
This guide explains how bonding works and how to position your company to get bonded.
What Are Construction Bonds?
Construction bonds are three-party agreements involving you (the principal), the project owner or GC (the obligee), and a surety company (the guarantor).
If you fail to meet your obligations, the surety company steps in to make things right — either by paying to complete the work or compensating for your default. The surety then comes after you to recover their costs.
The Three Main Types of Bonds
Bid Bonds
A bid bond guarantees that if you win a contract, you'll actually sign it and provide the required performance and payment bonds. It protects the owner from low-ball bids that contractors abandon.
Bid bonds are typically 5-10% of the contract value.
Performance Bonds
A performance bond guarantees that you'll complete the work according to the contract. If you default, the surety either hires another contractor to finish or pays the owner the bond amount.
Performance bonds are typically 100% of the contract value.
Payment Bonds
A payment bond guarantees that you'll pay your suppliers, subcontractors, and workers. It protects those below you in the payment chain from non-payment.
Payment bonds are typically 100% of the contract value.
Why Bonding Matters for Subcontractors
Access to Better Projects
Most public projects (federal, state, municipal) require bonds. Many large commercial projects do too. Without bonding capacity, you're locked out of this work.
Higher Profit Margins
Bonded work typically pays better. The bonding requirement filters out less established competitors, reducing competition and supporting stronger pricing.
Credibility Signal
Being bondable tells GCs that a third party has evaluated your company and deemed you creditworthy. It's a stamp of approval that opens doors.
How Sureties Evaluate You
Surety companies assess three main factors, often called the "Three Cs."
Character
Your personal and business reputation. Sureties look at your track record of completing projects, paying bills on time, and honoring commitments. Any history of defaults, bankruptcies, or legal judgments is a red flag.
Capacity
Your ability to perform the work. This includes your experience with similar projects, your organizational capability, your equipment and workforce, and your current workload relative to your capacity.
Capital
Your financial strength. Sureties want to see strong working capital (current assets minus current liabilities), adequate cash reserves, profitability over time, and low debt levels.
Financial Requirements for Bonding
The financial requirements vary by bond size, but sureties typically want to see:
Working Capital
A general rule is that you need working capital equal to 10% of your total bonding capacity. To qualify for a $1 million bond, you'd need roughly $100,000 in working capital.
Net Worth
Your total assets minus total liabilities should be positive and growing.
Profitability
Consistent profitability over the past 2-3 years demonstrates you can manage projects successfully.
Financial Statements
For larger bonds, you'll need CPA-prepared financial statements — often reviewed or audited statements, not just compiled.
Steps to Get Bonded
Step 1: Clean Up Your Finances
Before approaching sureties, get your financial house in order. Pay down debt, build cash reserves, and ensure your accounting is clean and current.
Step 2: Build Your Track Record
Complete projects successfully. Document everything. Build references from satisfied GCs. Your history of successful completions is your biggest asset.
Step 3: Find a Surety Agent
Work with an insurance agent or broker who specializes in surety bonds. They know which sureties work with companies like yours and how to present your application.
Step 4: Prepare Your Application
You'll need business and personal financial statements, list of current and completed projects, references from GCs, bank reference letter, and organizational documents (articles of incorporation, etc.).
Step 5: Start Small
Your first bonds will be small. Complete those projects successfully, and your bonding capacity will grow over time.
Growing Your Bonding Capacity
Bonding capacity isn't fixed — it grows as your company grows.
Demonstrate Success
Every successfully completed bonded project increases your credibility with the surety.
Strengthen Financials
As your working capital and net worth grow, so does your bonding capacity.
Maintain Good Relationships
Pay your bills on time. Complete projects on schedule. Communicate proactively with your surety about any issues.
Consider a Bonding Line
Once established, you can set up a bonding line — pre-approved capacity you can draw against for individual projects without re-applying each time.
Common Bonding Mistakes
Waiting Too Long
Getting bonded takes time. Don't wait until you need a bond to start the process.
Poor Financial Records
Sloppy accounting makes you look unbondable. Keep clean, professional financial records.
Overextending
Taking on too much work relative to your capacity strains your bonding relationship. Grow steadily, not recklessly.
Hiding Problems
If you're having issues on a project, communicate with your surety early. Surprises destroy trust.
Frequently Asked Questions
How much does bonding cost?
Bond premiums typically range from 1-3% of the contract value, depending on your creditworthiness and the project.
Can I get bonded with bad credit?
It's difficult but not impossible. Start with small bonds, demonstrate success, and your options will expand.
What happens if I can't complete a bonded project?
The surety steps in to complete the work or pay damages. Then they pursue you for reimbursement. A bond claim can make you unbondable for years.