Whether you are a client or contractor, you might find bonding capacity confusing. If so, you are not alone. Many people are confused regarding what bonding capacity is and when, if or why they need it. If this describes you, let our quick and easy primer demystify the bonding capacity process for you.
What is Bonding Capacity, Exactly?
Bonding capacity refers to the limit of bonds a contractor can issue on any job or contract. Bonds are issued on a per-project basis, so this limit is almost ironclad. When hiring a contractor, bonding capacity is one of the first issues a client should address. Along with that, he or she should ask about the aggregate limit. Aggregate limits refer to the absolute maximum number of bonds a contractor can have for any one project. The aggregate limit can include both bonded and unbonded contracts, so clients should go over each separate contract carefully.
Aggregate limits are usually comprised of three different amounts. The first encompasses the cost to complete any started projects. If your contractor starts one project, then leaves it briefly to begin another, his or her aggregate limit will encompass remaining costs on the first project. Additionally, the aggregate limit includes complete cost amounts on any contracts your contractor has signed but has not begun the projects for. Finally, the aggregate limit includes any contract amounts for bids your contractor has received but not awarded.
How Do These Limits Help Clients?
Surety bonds, aggregate limits included, are designed to protect clients. Bonding capacity lets you the client know exactly what your contractor is willing and able to do on a project, and what bids he or she is willing to accept. If the project goes wrong, you can point back to your contractor’s bond as evidence that what was promised was not delivered.
For example, let’s say your contractor promised to accept your company’s bid for a certain project. A few weeks later, he or she returns and says the bid will not be accepted because another company bid higher or lower. At that point, refer your contractor to his or her bonding capacity. Bonding capacity, specifically the aggregate limit, requires your contractor to apprise you of all bids that are still under consideration or not yet awarded.
Bonding capacity also assures you a contractor and his or her company are well-prepared to handle your project. Surety bond companies review several factors before giving a contractor bonding capacity. These factors include but are not limited to the company’s financial strength and available credit, banking history, credit scores, project references, current work and the financial strength of close competitors. As a client, you may ask for details on any of these factors when examining your contractor’s bonding capacity. Like aggregate limits, these factors are designed to protect the client from pitfalls like a company going into bankruptcy or having poor references.
Does Bonding Capacity Protect Contractors?
Yes. Bonding capacity keeps contractors from getting overwhelmed with projects or selling themselves short on bids. In addition, bonding capacity keeps contractors apprised of how their companies are doing. For example, if you are a contractor whose company has poor references or is not getting much work, you can use that to decide which if any projects to accept. If you notice a competitor is financially stronger than you, use that knowledge in your bond to apprise your company and help make changes.
Conclusion
Bonding capacity is often thought of as something that helps only the contractor or client. In reality, both parties benefit from it, and it is needed for every project or bid a client and contractor team might encounter. Always ask about bonding capacity when you are contracting for a company or trying to complete a project.