Sureties do not lend money. They extend credit on your performance and your character, then stand behind your promise to finish the job and pay the bills tied to it. Prequalification is how they decide whether to put their balance sheet next to your name. If you have ever watched a bid evaporate because a bond could not be issued in time, you know the pain. Strong contractors treat bonding like a core business system, not a last-minute errand.
This checklist grew from years of working with surety underwriters, CPAs, project owners, and contractors on both sides of the bonding desk. It covers what to assemble, what to fix before you apply, and how to speak the same language as the surety market. It also explains what changes as your needs move from a $500,000 performance bond to a $50 million single limit.
Why prequalification is not just paperwork
Owners use bonds to transfer performance and payment risk. The surety only steps in if a contractor fails, which means every bond is underwritten as if it is a zero-loss transaction. That mindset drives conservative review standards. The underwriter is asking a few basic questions: Can you do this job? Will you do it the way you promise? If trouble shows up, do you have the financial strength and discipline to adjust?
Those questions map to three buckets: capacity, character, and capital. Capacity covers the resources and operational systems to build the project. Character reflects your reputation, ethics, and claims history. Capital is your working capital and net worth, measured with accounting rigor. A good application must address all three, in detail.
Start with the surety’s perspective
The surety’s first pass usually looks like a triage. They glance at your current work in progress, a few key ratios, and how quickly you respond to requests. Sloppy, slow, or incomplete files suggest the same about job controls. Swift, accurate answers reduce perceived risk and friction. Your goal is to make it simple for the underwriter to say yes within the program limits you want.
Most standard markets prefer steady, profitable contractors with a track record of bonded work, reviewed or audited financials under the percentage-of-completion method, and no unpaid subcontractors or tax liabilities. Nonstandard markets will consider weaker credits, but at higher rates and with stricter terms. If your financial presentation is weak, you pay for it in premiums and conditions.
The documents you should have ready all year
Treat the bonding file like a living package that you update quarterly, not a once-a-year scramble. At a minimum, assemble the following:
- A current CPA-prepared financial statement for your construction company, using percentage-of-completion accounting, with schedules for work in progress, contract receivables, and underbillings/overbillings. Reviewed statements are the baseline once you seek single bonds above the low seven figures. Audited statements become necessary as you push into eight-figure programs or public work with strict thresholds. A detailed work-in-progress schedule with contract amount, costs to date, billings to date, estimated cost to complete, gross profit, and percent complete for each project. Update monthly. Tie it out to your general ledger. Bank reference letters and copies of any loan or line-of-credit agreements, including covenants, expirations, and collateral descriptions. Personal financial statements for all principal owners with at least 10 percent equity. Include contingent liabilities, guarantees, and any pledged assets. Keep them current within six months. A resume for key personnel, an equipment list with lien status, and evidence of insurance and safety program metrics, including EMR and recordable rates.
Those items alone Axcess Surety commercial bonds will not win an approval, but without them, you are dead in the water. I have lost count of deals that stalled because the WIP schedule was old or did not reconcile to the income statement.
The accounting backbone: percentage-of-completion done right
Construction accounting is its own language. Surety bonds contractors navigate best when the numbers tell a coherent story project by project. The surety will look for:
- Percentage-of-completion revenue recognition, not completed-contract for your main company. Completed-contract can be acceptable for very small or residential firms, but impedes bonding as jobs grow. Consistent, conservative cost-to-complete estimates. If profit fade shows up near the end of multiple jobs, that signals weak forecasting. If fade appears early and gets recovered, that suggests strong controls. Sensible handling of change orders. Approved change orders belong in contract value. Pending changes may be disclosed, but underwriters will haircut or exclude them. Clear segregation of direct job costs, indirect overhead, and equipment charges. Blurred categories erode confidence and distort project margins. Reconciled underbillings and overbillings. Chronic, large underbillings can indicate cash pressure or unapproved changes. Excessive overbillings may mask future profit fade.
A simple way to self-test: walk an underwriter through one representative job from bid through closeout. Show original estimate, buyout savings, approved changes, man-hour curves, major subcontractor status, and final margin. If you cannot do that with confidence, strengthen your project controls before chasing larger bonds.
Working capital and net worth: how much is enough
Two numbers carry outsized weight: working capital (current assets minus current liabilities, excluding related-party receivables and illiquid items) and tangible net worth. For many standard sureties, a quick planning rule is that your single bond capacity runs from 10 to 20 times adjusted working capital, while aggregate capacity falls around 10 to 15 times net worth. Those are broad ranges, not promises. Margins, history, and quality of information will shift the multiples up or down.
Look closely at what counts. A $1.0 million current asset line that includes $400,000 of slow retainage and $200,000 of shareholder receivables will be haircut sharply. Cash, near-current receivables, and unbilled work with signed change orders carry more weight. On the liability side, current maturities of long-term debt reduce working capital. Balloon notes coming due within twelve months will drag your ratios below thresholds, often right when you want to pursue new work.
The surety also watches debt-to-equity and bank line usage. If you are constantly maxed out on your revolver, the message is clear: one hiccup and cash stops flowing. Aim for unused availability and clean collateral, ideally on-balance-sheet working capital not already encumbered by blanket liens. If your lender requires a blanket lien, negotiate carve-outs for contract receivables or inventory commonly needed for bonded projects. Some banks will agree once they understand the dynamics.
Profit quality matters more than profit quantity
Underwriters pay attention to the shape of earnings. Smooth, modest margins that hold through closeout are preferable to spiky profits that drift downward at the end. Repeat work with owners who pay on time increases comfort. Low bid work with thin spreads, especially in unfamiliar geographies, raises questions.
An example I see frequently: a contractor shows 10 percent gross margins midyear, but by year-end those margins compress to 6 percent after change order friction and punch list costs. Do that two or three years in a row, and the surety will haircut your estimates on new jobs. The antidote is disciplined buyout, documented scope, and a culture that flags slippage early. Share your job cost review process with the underwriter. It shows you run the business with eyes open.
Character is not a soft factor
Sureties call past behavior a window into future choices. They check public records for liens, lawsuits, and judgments. They talk to GCs, owners, subs, and suppliers. They ask your banker how you behave when cash is tight. A clean record is not a requirement, but a thoughtful, honest explanation is. I would rather underwrite a contractor who owned a tough year and showed corrective steps than one who minimized issues or blamed everyone else.
Claims history deserves special attention. If you have had disputes, disclose them early with context and documentation. Show how they were resolved, what you learned, and why the root cause will not repeat. Nothing kills trust faster than the underwriter learning from a third party that you are in litigation you failed to mention.
The role of the construction CPA
There is a world of difference between a generalist CPA and a construction specialist. Sureties lean heavily on CPAs who understand WIP schedules, under/overbillings, indirect cost allocation, and revenue recognition per ASC 606. A compiled statement with no footnotes rarely supports meaningful bonded capacity. For a contractor seeking consistent bonds in the low seven figures, a reviewed statement dated within 90 to 120 days after year-end is the practical baseline. As single project sizes push into eight figures, audited statements become the norm.
Choose a CPA who will push you toward stronger controls and who understands how surety bonds contractors present. Ask whether they will meet with your agent and underwriter to walk through the numbers. That conversation often builds enough credibility to increase your line without waiting another full cycle.
Banking relationships and liquidity
A right-sized, flexible bank line helps you smooth cash swings between pay apps and vendor terms. Underwriters like to see:
- An asset-based revolving line tied to receivables and, where appropriate, inventory, with sufficient headroom to cover a one to two month billing cycle. Financial covenants you can live with, such as minimum tangible net worth and a current ratio target aligned with your business model. No chronic overdrafts or frequent, last-minute over-advances. A few clean months before a large bond request speak volumes. A lender who understands bonded work and will coordinate intercreditor or subordination agreements when needed.
Do not wait to negotiate these points until a bid is due. The surety may require a standby letter of credit, a funds administration agreement, or other accommodations. A cooperative bank relationship can speed these elements instead of turning them into roadblocks.
People and process: the capacity side
Financial strength will not rescue weak operations. Underwriters ask about your project managers, superintendents, and estimating team. They want to know who does buyout, who approves subs, and how you handle change orders. They are also sensitive to growth rate. Doubling volume in a year rarely goes well unless you bring in staff ahead of the curve and tighten systems.
Be ready to discuss your labor strategy. If you rely on a core crew and supplement with subs, show bench depth and your plan for peak loads. If you self-perform critical trades, share productivity metrics and crew availability. In a tight labor market, an overconfident staffing plan signals risk.
On the safety side, your EMR and OSHA recordables reflect culture and cost. An EMR near 1.0 is common. Anything materially above 1.0 requires a narrative and evidence of corrective steps. A strong safety program reduces indirect risk, insurance costs, and job disruptions, which the surety views favorably.
Subcontractors and supply chain
A good general contractor is only as strong as its subs. Underwriters pay attention to your prequalification process for subcontractors, the size of packages relative to sub capacity, and the mix of critical trades. They also ask how you mitigate concentration risk. If one sub holds 40 percent of the job value, the domino risk is obvious.
Explain your approach. Do you require bonds from major subs? Do you use joint check agreements on sensitive trades? How do you validate sub backlog and cash position? On large jobs with long lead items, share your procurement plan and escalation clauses. Material price swings and supply chain delays have sunk more profit in the past few years than any other single factor.
Tax posture and legal housekeeping
Unpaid payroll or sales taxes become instant red flags. They can prime other creditors and drain working capital at the worst time. If you have a payment plan with a tax authority, disclose it and provide the agreement and proof of current status. Get corporate records clean: active state registrations, good standing certificates, updated ownership ledgers, and minutes where required. Small housekeeping issues often trigger disproportionate concern because they hint at broader sloppiness.
Growth strategy and bidding discipline
Bond programs tend to loosen when your growth is measured and your backlog mix feels balanced. Underwriters want to see how you decide what to chase and what to skip. Share your bid-hit ratio by segment, your go/no-go criteria, and post-mortems on both wins and losses. If you are expanding into a new geography or trade class, show how you will bridge the experience gap. That can include a strategic hire, a joint venture with a qualified partner, or starting with smaller scopes before ramping up.
Be candid about pricing discipline. Chasing volume with thin or negative margins to feed overhead is how companies die. Underwriters prefer you to shrink responsibly for a season rather than take work that does not pay its way.
What changes at different bond sizes
A $250,000 performance bond typically runs through a streamlined process, especially for contractors with a small bank line and decent personal credit. As you cross into the $1 million to $5 million range, expect the following:
- Reviewed year-end financials prepared by a construction CPA, quarterly internals, and a current WIP schedule. A deeper dive into project management staff, equipment, and subcontractor prequalification. Tighter scrutiny of under/overbillings, cash flow timing, and change order management.
Above $10 million single bonds or $25 million aggregate programs, the bar rises again:
- Audited statements, often with interim reviews. Formal bank line with ample availability and constructive covenants. Evidence of large project controls, including CPM schedules, cost coding discipline, and executive oversight. A clear bench of PMs and superintendents with comparable project experience. Contract-specific risk plans, such as material hedges, escalation clauses, and sub bonding.
These are not rigid thresholds, but practical markers. The surety’s comfort hangs on whether your systems and people match the complexity and cash demands of the projects you are pursuing.
Pricing, indemnity, and collateral
Bond premiums are usually a small percentage of the contract amount, often on a sliding scale where the first tranche costs more per thousand than the later tranches. Rates vary by trade, size, and market conditions. More important than price is the general indemnity agreement. Owners and spouses often sign personal indemnity. The surety expects to be made whole if they incur loss or expenses. Read the form carefully. Ask about job-specific waivers, limits on real estate collateral, or provisions that trigger upon simple allegations rather than adjudicated default. Some sureties will negotiate around the edges for strong accounts, but the essence rarely changes.
Collateral is rare in standard programs, but shows up when the surety wants extra security. It can be cash, letters of credit, or assignment of specific receivables. If a surety asks for collateral, examine whether the job or program size is ahead of your current financial strength. Sometimes the right move is to scale back until the next balance sheet supports the leap.
Common reasons applications stall and how to avoid them
- Out-of-date financials or WIP schedules. Keep a quarterly rhythm, reconcile, and tie numbers to your GL. Stale data stalls decisions and signals weak controls. Sloppy or incomplete ownership disclosures. List all owners, shares, and any side agreements. Surprises later will sour the relationship. Unresolved tax liens or vendor disputes. Clean them up or present documented payment plans with proof of compliance. Overreliance on underbillings. Convert work into billings promptly. Pending change orders do not pay suppliers. Aggressive growth with thin staff. Hire ahead of volume, and show resumes and org charts that match backlog.
Building a strong relationship with your surety and agent
The triad of contractor, surety agent, and underwriter works best with open communication. Bring your agent into strategic conversations early, not just when you need a bond next week. Preview your pipeline, acquisition ideas, or plans to enter new markets. If a quarter runs weak, explain quickly with numbers and corrective actions. I have seen sureties support good accounts through soft patches because trust was already in place.
Choose an agent who places a lot of construction business and who can translate your story into the underwriting memo sureties want to see. The memo should anticipate questions, not amplify them. It should connect your past to the project in front of you with proof, not platitudes.
A practical flow for getting ready
Use this simple sequence when you plan to increase your bonding line or bid a larger job:
- Close your last quarter with clean internals and a reconciled WIP. Verify aging schedules, retainage, and job cost tie-outs. Meet with your CPA and agent to review results and identify any adjustments that improve clarity, such as reclassifications or footnote detail. Update resumes, equipment lists, insurance certificates, EMR letters, and bank references. Obtain commitment letters for lines of credit with terms and availability. Map the target job to your track record. Prepare a one-page project brief: scope, schedule, procurement plan, key subs, and cash flow curve with expected pay app timing. Preclear any bank or legal steps that might be required, such as intercreditor agreements or indemnity updates.
When you hand an underwriter a package that follows that arc, you dramatically cut review time and improve the outcome.
Edge cases and judgment calls
Not every contractor fits the standard mold. Specialty trades sometimes carry big equipment and inventory that distort working capital. Seasonal firms have lumpy quarters. Family businesses show shareholder loans that, economically, function like equity. Underwriters will consider adjustments if the facts support them. Convert genuine long-term shareholder loans to subordinated debt with clear terms. Document seasonality with three-year quarterly trends. If equipment is core to the margin, carry an updated appraisal and maintenance logs to demonstrate condition and liquidity.
Another edge case is rapid growth after a marquee win. The right move can be to seek a co-surety or reinsurance structure to spread risk. That requires earlier engagement and more formality, but it lets you capitalize on momentum without snapping your balance sheet.
The human factor on tight timelines
Bid days compress everything. If you are chasing a must-win project that requires a bond capacity jump, call your agent and underwriter two or three weeks before final pricing. Share preliminary bid spreads, labor plans, and supplier quotes. If escalation is in play, include vendor letters with price-hold terms and potential surcharges. Create a realistic cash curve that includes retainage and typical pay cycle delays for the owner. An underwriter who understands your day-one plan is more willing to stretch than one who meets your file for the first time after the bid results post.
What owners and GCs read in your bond
Owners see a bond as third-party validation. When a surety issues, it means someone with skin in the game reviewed your financials and operations to a professional standard. Some owners go further, calling on the surety for comfort about your backlog or capacity. If you want repeat work, keep that relationship positive. Avoid forcing the surety to chase updates or chase you for financial statements. A contractor who treats the surety like a partner, not a police officer, earns flexibility when it counts.
Putting it all together
Prequalification is not a one-time test. It is a habit of running your business with enough transparency and discipline that an outside party can follow your thinking. The essentials are straightforward:
- Clean, construction-specific financial reporting with current WIP detail. Adequate working capital and net worth, with liquidity that matches your backlog. Credible people, processes, and safety culture that scale with project size. Banking support and tax compliance that leave no surprises. Candor about history, claims, and growth plans, backed by documentation.
Get those pieces right and your bonding program becomes a strategic asset. It unlocks larger, better projects and stabilizes relationships up and down your supply chain. Skip them and you live at the mercy of deadlines, rate hikes, and near misses.
For contractors who view surety as a cost, prequalification feels like friction. For contractors who view surety as a partner, it becomes a forcing function for better controls, stronger cash cycles, and sharper bid discipline. The latter group tends to win more work, keep more margin, and sleep better when storms hit.