What ratios and benchmarks does a surety use to evaluate financial health?
Matt Donovan
Regional Vice President, Contract Surety
Nationwide
Contract surety underwriting relies on a disciplined financial analysis framework that helps underwriters evaluate a contractor’s ability to complete bonded projects reliably and profitably. To gauge both financial and operational strength, underwriters focus on core metrics that reveal liquidity, leverage, profitability, and workload management—each essential to assessing risk and setting appropriate bond programs. Liquidity remains a foundational measure. Underwriters rely heavily on the current ratio and analyzed working capital to determine whether a contractor can sustain project cash demands and absorb disruptions. Strong liquidity supports short-term performance and directly influences a surety’s willingness to extend or expand single and aggregate bond limits.
Profitability metrics provide insight into operational discipline. Gross and net profit margins and return on equity help underwriters determine whether a contractor’s estimating, project management, and cost control practices are producing consistent and reliable results. Contractors with stable margins tend to demonstrate greater predictability and a lower risk of job-related losses. Sureties diligently review margin trends across multiple work-in-progress schedules to evaluate bidding accuracy, cost controls, and overall execution capability. Underwriters also evaluate leverage, most commonly through debt to equity ratios, to assess long term financial stability and vulnerability to economic shifts. Conservative leverage levels indicate a contractor with borrowing capacity & financial resilience during downturns.
These metrics, combined with regular backlog analysis & growth forecasts, as well as other analysis of trends help underwriters determine whether a contractor’s workload is appropriately sized relative to its financial base and serve as indicators of project level risk and management effectiveness. These metrics enable underwriters to make well-informed, responsible bonding decisions.
How does a contractor’s existing workforce and recruitment, training and retention programs impact its ability to obtain bonding?
Tina Hawkins
Vice President, National E&C Deputy Group Leader
Chubb
A contractor’s workforce is a primary indicator of its capacity to perform, and performance is fundamental to securing and maintaining surety bonding. Sureties evaluate not only financial strength, but also the operational infrastructure that supports consistent project execution. An established, experienced workforce signals that a contractor possesses the in-house resources necessary to pursue, manage, and successfully complete work.
Structured recruitment, hiring, and training programs demonstrate intentional investment in talent. In today’s market, skilled labor shortages remain a significant issue. Contractors that prioritize high-quality training and retention create a foundation for the successful execution and delivery of their backlog. Proven expertise, unified project controls, and a “One Team” approach directly influence profitability and reduce project completion risk. These factors reinforce the surety provider’s confidence in the contractor’s ability to grow in a deliberate and controlled manner.
The retention of senior leadership and experienced field personnel further reflects stability at all levels of the organization. These actions help to build trust with both the contractor’s surety provider and their customers. Sureties closely evaluate the character of a contractor, including its leadership, core values, and succession planning. Continuity from within strengthens long-term operational performance and supports the responsible expansion of job size and program growth.
Ultimately, a strong and established workforce translates to sustained performance. Consistent results, an aligned culture, and disciplined growth enhance a contractor’s reputation and financial profile. These qualities all lead to stronger surety support and the ability to secure and maintain bonding capacity.
Can regular communications with surety providers help construction firms access larger bonding capacity and more favorable terms?
Jason Dettbarn
Senior Vice President-National Contract Surety Leader
Merchants Bonding Company
Yes, when it’s strategic.
Contractors ready to grow often face the same challenge. You’re prepared to pursue larger projects, but your ability to compete depends on your bonding capacity. Capacity doesn’t expand with ambition alone, though. It expands when confidence is built through communication.
Some firms only contact their surety when financial statements are due or a bond is urgently needed. That reactive approach means underwriters have to make decisions with limited context, which can result in conservative limits or tighter terms. So, growth gets constrained not by capability, but by uncertainty.
The more proactive path? Viewing your surety as your risk partner and trusted guide, working with them to prepare for your pursuit of larger work. That kind of preparation is more than simply sharing financials; it’s discussing pipelines, target project size, hiring plans, equipment investments, and capital strategy. It’s about identifying potential hurdles like working capital strain, geographic expansion, or margin compression.
These early and transparent conversations can reduce uncertainty and increase flexibility. Consistent contact establishes credibility which, over time, can support higher single job limits, larger aggregate programs, and more favorable terms for you.
Bonding capacity is built on trust. Contractors who communicate proactively and treat bonding as an intentional part of their growth strategy are the ones who build it.
Paul Kennedy
Vice President, Contract Surety
IAT Surety, a division of IAT Insurance Group
The short answer is yes. I’m a firm believer that working with agents and brokers who actively facilitate communication with the surety is critical to long-term success. A surety’s role is to understand, as thoroughly as possible, how a contractor operates. That includes everything from people management and cost controls to project selection, risk tolerance, and overall decision-making.
The more insight a surety has into how a contractor approaches its business – and what drives its risk decisions – the easier it becomes to offer meaningful support and increased capacity. Operating in a vacuum doesn’t benefit either party. Open dialogue provides the context needed to evaluate opportunities effectively.
This is especially important when a contractor pursues larger projects or enters new markets. When a surety understands the thought process behind those moves, it builds confidence and makes it easier to support those opportunities.
Equally important is a contractor’s willingness to discuss challenges. Construction is inherently risky, and issues are inevitable. Sureties understand this. What matters most is transparency – being upfront about problems, outlining corrective actions, and showing how similar issues will be prevented. That level of honesty builds trust.
Communication goes both ways. The strongest relationships are collaborative. Contractors who tap into the experience a surety brings – gained from working with many clients – gain valuable perspective. At its best, that shared insight helps contractors make informed decisions and positions both parties for long-term success.
What should contractors know about the three Cs (character, capacity and capital) used to evaluate contractors for surety capacity?
Meghan McArdle
Vice President, Contract Surety
Arch Insurance Group Inc.
The three Cs—Character, Capacity and Capital—comprise the core framework underwriters use to extend credit and evaluate bonding qualifications. A good surety relationship is based on trust and the belief that all parties will honor their obligations. Trust is built through face-to-face meetings, regular communication, and timely and reliable financial reporting. Providing timely financial statements and work-in-progress schedules that reflect financial stability and operational abilities demonstrates a commitment to transparency. Accurate financial reporting establishes your capital base.
Capacity is derived from proven operational capabilities and project performance over time. Capacity can often be expanded if key underwriting concerns like owner selection, project management abilities, and sub-contractor risk are reviewed and positively evaluated.
While each characteristic is fundamentally important, it’s imperative to understand that each “C” isn’t created equal. You need to take a holistic approach to comprehending their application. Character is first because without it, the assessment of Capacity and Capital are secondary. In many instances strong character can offset a thin capital base or capacity push. Measurable financial benchmarks can be established to increase capital over time to meet capacity requirements. Capital and capacity can also expand with the right long-term strategic plan. However, a strong capital base and positive job performance cannot overcome questionable character traits. Sureties will be more inclined to increase capacity when there is a history of financial stability, operational dependability, and adequate risk mitigation, along with open communication. All are tools contractors can use to build trust and establish a strong bonding relationship.
How does an owner exiting a construction business impact the amount of bonding capacity that a surety is willing to extend?
Henry W. Nozko Jr.
President
ACSTAR Insurance Company
An owner exiting from a construction business could have an effect on the amount of bonding capacity its surety will extend. The consequence will range from little to no effect, to a major ramification including a potential withdrawal of support by the surety. Let’s assume the existing owner is an indemnitor and will no longer provide personal indemnification to the surety. Let’s also assume the exiting owner is one of several owners and the exiting owner does not have an active role in operating the company, and the exiting owner is not a significant source of financial support as an indemnitor. Additionally, the buyout of the exiting owner is not funded by the Company. This situation would likely have little or no effect to the bonding program provided by the surety.
However, a more transformative situation could have a much greater impact on the surety program. Assume the exiting owner is the major shareholder and the major operating manager of the company, and will no longer act in that role. Assume the company will be purchasing and financing the ownership shares held by the exiting owner. This type of arrangement most likely will impact the surety program significantly. The program size might be reduced. The program cost might by increased. Other, less desirable underwriting terms may be applied by the surety and possibly the surety program could be withdrawn.
There are of course many variations of the above examples. It is best to advise your surety of a pending ownership change prior to closing. At a minimum, the surety will appreciate the heads-up and might offer minor tweaks to the transaction that could be beneficial to the resulting surety program. Circumventing advance disclosure will, at a minimum, be less enthusiastically received by,and strain the relationship with the surety, upon its discovery of the event.
How does an owner exiting a construction business impact the amount of bonding capacity that a surety is willing to extend?
Brock Masterson
COO—Surety Division
Crum & Forster
Personal relationships are key to strong, lasting surety partnerships between the surety, contractor, and agent. An owner’s departure can disrupt the status quo, so the surety must assess the contractor’s expertise and leadership to maintain stable capacity. The contractor will also need to maintain sufficient financial strength to continue to qualify for surety credit, which will require thoughtful financial planning tied to any sale of ownership. These material underwriting items require strategic review and communication between all parties to ensure there is no interruption in surety capacity.
It will be important for the surety to understand how management and culture of the company will be perpetuated with new leaders. Is there a long-time employee who has been groomed for an executive role, or will it be necessary to hire externally? Does the company have a formal continuity plan? Building formal plans for management perpetuation will allow for continued surety support.
Relatedly, how will the owner’s departure impact the company financially? Is there a formal buy/sell agreement in place that allows for equity to be repurchased over time or financed via life insurance? Proper planning will allow the contractor to maintain the necessary capital and liquidity needed to properly manage their business with limited reliance on outside financing that could impair the company in the event of operational stress.
By regularly discussing these strategic decisions with the agent and surety, contractors can ensure they retain a stable surety program during an ownership change.
SEE ALSO: PROVE IT: WHAT SURETY UNDERWRITERS SEEK IN CONTRACTORS
