Every contractor who bids public work or larger private jobs will eventually meet the gatekeeper known as prequalification. When the contract requires a performance bond, that gatekeeping shifts from a general skills and references check to a rigorous underwriting process that looks a lot like a lender sizing up a loan. If you have ever wondered why some firms breeze through bonding while others stall for weeks or get turned away at the last minute, the answer lives inside performance bond prequalification.
This is a practical guide from the trenches. I have watched subcontractors get their first bonds through perseverance and preparation, and I have seen strong builders denied because their financials were not ready for prime time. The point is not to turn you into an accountant or a surety underwriter. It is to show you, concretely, how the process works, what really moves the needle, and how to stack the odds in your favor without slowing the pace of your business.
What a Performance Bond Actually Covers
A performance bond guarantees the owner that the contractor will complete the job in accordance with the contract. If the contractor defaults, the surety steps in to finance completion, hire a replacement, or pay the owner up to the penal sum of the bond, usually 100 percent of the contract price. Owners demand it to protect against nonperformance and the chain reaction that follows delays and cost overruns.
Contractors sometimes ask, what is a performance bond compared to a payment bond? Payment bonds protect subs and suppliers by guaranteeing they get paid. Many projects require both. For the surety, the performance bond is the bigger risk, because it can involve complex project completion and large losses when things go wrong. That is why prequalification exists and why it feels demanding.
Where Prequalification Fits and Why It Matters
Prequalification is the surety’s process for determining whether it is comfortable guaranteeing your performance on a specific job or across a program of jobs. It is ongoing. Early on, the surety may scrutinize each project, then as the relationship matures, you may receive a single or aggregate bonding line and approvals become faster.
This matters for three reasons. First, your bonding capacity dictates the size and number of projects you can pursue. Second, the terms you receive, including indemnity requirements and rate, are directly affected by your financial strength and track record. Third, a clean prequalification packet shortens underwriting cycles, which is the difference between submitting a live bid or watching it pass by.
What Underwriters Actually Look At
Strip away the jargon and you will find underwriters focused on a handful of fundamentals: character, capacity, and capital. The day-to-day expression of those three shows up through documents and patterns in your business.
- Financial strength and quality of financial reporting. Underwriters analyze working capital, net worth, debt levels, and profitability. Working capital is current assets minus current liabilities, and for bonding, not all current assets are equal. Cash is king, receivables from solid owners are strong, and slow or disputed receivables are discounted. Inventory is often discounted heavily unless you can prove liquidity. Job borrow, where you are using supplier credit or sub payables to float the job, is not a substitute for capital. Project controls and performance history. They want to see that you can estimate accurately, track costs in real time, bill promptly, and close jobs without lingering claims. On-time completion with a clean punch list is more persuasive than any sales pitch. Management and key personnel. Who runs the work? Who runs the back office? A strong second-in-command or seasoned project manager can increase capacity more than an extra truck in the yard. Bank support and access to credit. A modest working capital line with clean borrowing base reports and no covenant violations signals financial discipline. Erratic overdrafts suggest the opposite. Indemnity structure. Most contractors provide personal and corporate indemnity. A well-structured indemnity package with spouses joining where needed gives underwriters comfort, which translates to capacity.
The specifics vary by surety and by the size of the bond. A $350,000 first bond may be underwritten off in-house financials and tax returns. A series of $5 million bonds will demand CPA-reviewed or audited statements, work-in-progress schedules, and quarterly updates.
The Document Package That Opens Doors
You can save weeks by anticipating what the surety will ask for and having it ready. At a minimum, expect these items for serious capacity:
- CPA-prepared year-end financial statements, ideally on a percentage-of-completion basis with footnotes, plus a work-in-progress (WIP) schedule. For larger programs, reviewed or audited statements are the norm. Interim financials, typically quarterly, with an updated WIP. Underwriters want to see if margins are holding midyear and how cash is flowing. Bank reference letter and current line-of-credit terms. Include the borrowing base formula and any covenants. Continuity documents, such as a buy-sell agreement, key person insurance details, and succession planning notes. These do not need to be elaborate, but the absence of any plan raises risk. A brief company resume: ownership structure, bios of key managers, equipment list if relevant, and a project history highlighting the last three to five comparable jobs.
In addition, gather aging reports for accounts receivable and accounts payable, federal tax returns for the last two years, and a backlog schedule that ties to your WIP. The more your documents reconcile to each other, the faster the process goes.
How the WIP Schedule Drives the Conversation
If you have never prepared a WIP schedule, your CPA can help set up a template. It lists each active job, the contract value, approved change orders, costs to date, billed to date, estimated cost at completion, percent complete, and overbilling or underbilling. Underwriters rely on it to judge estimating accuracy and cash flow. Here is how they interpret common patterns:
- Chronically underbilled jobs signal slow billing practices or owner disputes. Either one can choke cash. If the owner pays net-45 and you bill late, the working capital hit compounds. Heavy overbilling without corresponding cost progress raises red flags. Overbilling is not bad in moderation, it can fund mobilization, but it must align with earned progress. Extreme overbilling looks like borrowing from one job to fund another. Swinging gross profit margins suggest estimating errors. If a job starts at a 12 percent margin and ends at 3 percent, underwriters will ask what changed and whether the lesson is embedded in future bids. High change order volume without signed approvals burns contractors. Sureties have seen too many projects turn unprofitable because work proceeds without formal changes. They will ask how you manage approvals and what percentage are still pending.
A clean, consistent WIP tells the underwriter your house is in order. Two pages of footnotes explaining outliers are fine and often helpful. Silence is not.
The First-Bond Hurdle and How to Clear It
Newer contractors face a chicken-and-egg problem: owners require a performance bond, but sureties prefer proven track records. You can bridge that gap with a thoughtful approach.
Start with project selection. Target a job within your operational comfort zone, even if it means passing on a larger opportunity. Align the scope with your résumé and the team you can put in the field today. When the first bonded job runs smoothly, capacity opens up more than you might expect.
Strengthen the file with personal liquidity and collateral if needed. I have seen first-time bonds get approved because the owners kept $250,000 in liquid savings and agreed to maintain a minimum net worth covenant with the surety. That is not universal, but it matters at the margins.
Bring a banker and CPA who know construction. An industry banker who will confirm your line, describe your borrowing base, and speak to your account conduct is worth more than a generic letterhead note. A CPA who prepares contractor-specific statements will capture over/under billings and revenue recognition properly. Underwriters read those footnotes.
If you lack in-house project controls, consider a seasoned consultant for the first job to set up cost codes, subcontracts, and billing calendars. The cost can be recouped in smoother cash flow and credibility with the surety.
Risk Factors That Shrink Capacity
Every contractor feels pressure to grow. The surety’s job is to recognize healthy growth versus dangerous expansion. These are the patterns that tighten underwriting:
- Long travel distances from your home base without local relationships. Mobilization and productivity suffer, subs are unfamiliar, and the owner’s culture may be new to you. One big out-of-town job can strain a small company more than three local ones. Stacking multiple jobs with the same completion date. Labor and equipment become bottlenecks. If one job slips, the others do too. Underwriters will ask how you are sequencing crews. Thin gross margins. Chasing price-driven work at 4 to 6 percent margin can be viable if overhead is lean and execution is flawless. It leaves little room for error or weather. With thin margins, underwriters often reduce the single job size they will support. Concentration risk. If 80 percent of your backlog is with one owner, you are exposed to their payment practices and decision cycles. Spread your work among several respected owners if possible. Litigious history and unresolved claims. A single dispute can be explained. A pattern suggests either poor documentation or overly aggressive stances that drain cash and attention.
Each of these can be managed if you anticipate them. Write down how you will mitigate the specific risks on the next big bid, and share that plan with your broker and surety. Thoughtful mitigation often increases approval odds even when the numbers are tight.
How to Present a Job for Approval
When you seek approval for a specific bond, do not just send the contract and ask for a stamp. Frame the job the way a builder would in a kickoff meeting. Include:
- A concise project narrative: scope, schedule, delivery method, and unique risks. If the project contains unfamiliar elements, name the specialist subs or consultants you will engage. A cost build-up or detailed estimate summary. Show labor, materials, equipment, subcontractor quotes, and contingency. If a bid alternates between vendor quotes, explain your selection criteria. A schedule showing critical path and major milestones. Underwriters are not schedulers, but a clean bar chart that aligns with billing milestones shows planning discipline. Your team sheet and key subcontracts. Resume-size bios for the PM and superintendent plus letters of intent from critical subs tell the underwriter you can mobilize. The owner’s payment terms and retainage. Clarify whether pay apps are monthly, the review timeline, and how retainage releases. Pair this with a simple cash flow forecast so the surety sees you can carry the job.
I have watched approvals swing from hesitant to green-lit after a contractor added a two-page risk plan showing how they would handle long-lead materials, winter conditions, and a narrow site. Clarity reduces perceived risk.
Capital, Working Capital, and What Counts
Underwriters care about two layers of financial cushion: working capital and equity. Working capital pays bills while you execute. Equity absorbs shocks like margin fade or delayed payments.
Boosting working capital takes more than keeping cash in the checking account. Practical moves include accelerating receivables by tightening billing cycles, negotiating deposits from owners for custom materials, and managing payables without stretching suppliers to the breaking point. A bank line that floats receivables for 30 to 45 days is useful if you keep it within borrowing base limits and avoid persistent max-out behavior.
Not all cash-equivalents are created equal. Underwriters often discount related-party receivables, inventory that is not readily saleable, and retainage that is months away. If your balance sheet leans on those items, address it proactively in your notes.
On the equity side, retained earnings are the anchor. Taking distributions that leave the company thin in the months following year-end is a common mistake. If you plan a large distribution, discuss timing with your CPA and surety. I have seen contractors delay a distribution by 60 days, present stronger interim financials, obtain a higher bond line, and then proceed with a partial distribution once the big job was underway and cash positive.
The Role of Personal Indemnity and Why It Matters
A performance bond is not insurance in the traditional sense. If the surety pays a loss, it looks to the contractor and indemnitors to be made whole. Personal indemnity aligns incentives but can be tough for owners who have spent years building personal assets.
Negotiate the indemnity structure thoughtfully. Spousal indemnity is common, but certain assets may be excludable under state law or by agreement, such as retirement accounts protected by ERISA. You can sometimes carve out primary residences when equity is small relative to overall exposure. The surety’s willingness to provide carve-outs improves as your company’s balance sheet strengthens and your performance history grows.
For closely held companies with multiple owners, cross-indemnity and corporate indemnity should be clear and signed early. Avoid last-minute scrambles where a minority owner balks at the signature and delays approval.
Rates, Terms, and What You Can Influence
Bond rates typically fall in a range, often tiered by size. Small bonds might cost in the 2 to 3 percent range, while large, qualified contractors might see sub-1 percent annualized equivalents for multi-year work, especially when bonded in programs. You cannot bargain your way to a low rate if the numbers do not support it, but you can influence terms over time by reducing underwriter workload and risk.
If you produce timely, accurate quarterly financials, maintain clean WIP schedules, and rarely submit emergency requests, your surety will reciprocate with faster approvals and sometimes higher capacity without a full committee review. Just as important, your broker can advocate more effectively when they can point to a pattern of transparent reporting.
When the Answer Is “Not Yet”
A denial does not mean never. It means the surety sees a mismatch between your current capacity and the job’s demands. The smart move is to ask for a roadmap, not to shop endlessly for a different answer. Most surety markets share the same fundamentals. If three reputable sureties say your working capital is thin, the message is clear.
Ask for specifics. How much more working capital would make the job viable? Does a joint venture with a larger contractor change the calculus? Would phasing the project reduce peak exposure? I have seen contractors turn a no into a yes by:
- Splitting a single large contract into two phases with separate bonds, reducing peak exposure by 30 to 40 percent. Hiring an independent project controller for the first six months to tighten cost tracking and billing. Injecting additional equity after tax season once final liabilities were known, which lifted working capital above the surety’s threshold.
Practical Moves That Improve Approval Odds in 90 Days
If you need a near-term bump in credibility, there are disciplined steps that make a difference within a quarter. Keep them focused and measurable.
- Upgrade your financials to CPA-reviewed statements with contractor footnotes. The percentage-of-completion method and a proper WIP schedule carry weight. If your year-end is near, time this upgrade to hit the underwriter’s desk before you request capacity. Clean up receivables older than 60 days. Either collect, document valid disputes with a timeline, or write off clearly uncollectible balances. A bloated aging report hurts working capital and annoys underwriters who doubt recoverability. Lock down change order protocol. Require written approvals before field work begins except for true emergencies. Train PMs to submit changes with backup weekly. Even a simple one-page policy included in your submission shows intent and reduces perceived risk. Right-size your backlog. If your team is stretched, finish two jobs cleanly before taking the next pair. A crisp closeout with quick retainage release strengthens cash and the story you tell. Have your banker raise or reaffirm your line with a letter stating the amount, maturity, collateral, and your compliance history. It takes a phone call and an updated borrowing base, and it signals outside confidence.
These are not cosmetic fixes. They directly improve the inputs underwriters use.
Owner Requirements, Bid Bonds, and the Domino Effect
Public owners and many private developers require a bid bond on the front end. The bid bond commits the surety to provide a performance bond if you are low and the owner awards the job on your submitted terms. Bid bond limits essentially mirror your performance bond capacity. If your prequalification is weak, you may still submit a bid bond for a small job, but you risk a scramble if the award arrives and the performance bond is larger or contains tougher terms.
Read the owner’s bond forms before you bid. Some owners use forms that include onerous provisions like no cap on liability, liquidated damages that multiply indefinitely, or unusual notice provisions. If your surety will not accept those terms, negotiate during the bid phase or consider passing. A painful example: a contractor bid a municipal job where the proprietary bond form required the surety to pay full liquidated damages plus completion costs without the usual caps or defenses. The surety refused the form after award, and the contractor lost the job plus credibility with the owner, all because the team did not check the form early.
Private Work, Design-Build, and Special Cases
Not all performance bonds are created equal. Design-build projects layer design liability into the delivery method. Underwriters will ask who holds design contracts, whether professional liability coverage is adequate, and how design contingencies are handled. If you are the design-builder, present your designer’s credentials and your coordination process. If you are a trade contractor on a design-build team, clarify the scope boundaries to avoid gap risk.
On private work, owners sometimes accept alternatives like letters of credit, subcontractor default insurance, or parent guarantees. Sureties still want to see strong fundamentals, but the flexibility around terms can be greater. That said, letters of credit tie up bank capacity and can squeeze your liquidity. Weigh the trade-offs with your banker and surety broker rather than treating an LOC as an easy shortcut.
Your Broker Is a Force Multiplier
A seasoned surety broker frames your story, selects markets that fit your size and specialty, and knows which underwriters have an appetite for your risk profile. The broker’s job is not just to email your financials to ten markets. It is to help you prepare a coherent submission, anticipate objections, and sequence asks so you do not burn credibility on long-shot requests.
Expect a good broker to push you, sometimes uncomfortably. They will suggest hiring a controller, slowing distributions, or narrowing bid targets for a quarter. That pressure reflects what the underwriter will think. Accepting the feedback and acting on it is often the shortest path to more capacity.
Common Myths That Waste Time
Three misconceptions show up regularly and derail otherwise qualified contractors.
- “If I win the job, the surety will figure it out.” Underwriters do not reward urgency created by a surprise award. If anything, it makes them more conservative. Vet capacity before you chase. “I can hide debt in my equipment leases.” Underwriters read footnotes and calculate liabilities. They add back lease obligations when assessing leverage. Transparency helps your case. “My taxes show low profit, so I pay less tax and still get bonds.” Minimizing taxable income can starve your balance sheet. Strong retained earnings and adequate working capital drive capacity. Work with a CPA who balances tax strategy with bonding needs.
Building a Prequalification Culture
The contractors who rarely sweat approvals do not operate with secret formulas. They build routines that turn prequalification into muscle memory.
They close the books on a schedule and update WIP monthly. They run cash flow forecasts that actually match billing, and they enforce change management that produces signed orders. They debrief tough jobs and adjust estimating assumptions. They keep bankers, CPAs, and brokers in the loop, not just when something is on fire. Over time, the surety sees the pattern and relaxes friction.
You can move in that direction regardless of your current size. Start with consistent reporting and precise job controls. Then align your bid strategy with your team’s actual capacity, not the number of opportunities on the street. The performance bond is a promise you make with a third party standing behind you. Prequalification is simply that third party asking, with Axcess Surety insurance good reason, whether your numbers and your habits support the promise.
When the answer is yes, approvals are uneventful and fast. When the answer is not yet, the path forward is clear: tighten the numbers, show your plan, and pick the next job that proves the case.