Surety isn’t just about paper promises. When a bonding company backs a contractor or a commercial obligation, it is betting hard dollars on someone else’s performance. That bet gets smarter and safer when CPAs and attorneys sit close to the table. The best surety outcomes are rarely about the lowest premium or the quickest approval. They hinge on clean financials, thoughtful legal structures, clear risk allocation, and a steady rhythm of communication among three professionals who understand each other’s roles and constraints.
I have watched strong builders stumble because their books were good but not bond-ready, and I have seen difficult claims wrap up cleanly because the company’s counsel, the contractor’s attorney, and the surety’s in-house lawyer kept the same facts and dates in view. This is a world of details: a work-in-process schedule that reconciles to the trial balance, a cross-default clause buried in a credit agreement, a subcontractor prequalification that wasn’t renewed after a key license expired. The texture of those details is where a bonding company leans heavily on CPAs and attorneys.
What a Bonding Company Actually Underwrites
A bonding company is not an insurer in the traditional sense. It provides a three-party guarantee: if the principal fails to perform or pay, the surety steps in for the obligee’s benefit and then expects reimbursement from the principal. The underwriting lens is closer to bank credit than to casualty insurance. Underwriters want to know whether the principal can perform, and if not, whether there is enough liquidity, collateral, and recourse to make the surety whole.
The anchor is the contractor’s financial statements. Not just any statements, but statements that reflect the economics of long-duration jobs. Percentage-of-completion accounting, consistent revenue recognition, and a WIP schedule that ties to the general ledger are baseline requirements for serious bonding capacity. A bonding company also cares about working capital and net worth, both qualitatively and quantitatively. Two contractors can show the same current ratio, but the one with a heavy inventory of specialized materials or slow-certified receivables is far less bondable than the one with cash and clean progress billings. This is where the CPA’s experience in construction or project-based accounting matters more than any single ratio.
Legal structure sits beside financial strength. Indemnity agreements, cross-corporate guarantees, and ownership arrangements determine what happens if something goes wrong. Attorneys draft the general indemnity agreement that a bonding company requires from owners and affiliates, but they also interpret how that indemnity interacts with bank liens, joint venture agreements, or a corporate restructure. If the surety thinks it has recourse to a holding company but the operating company’s assets are fully pledged to a senior lender without carve-outs, the perceived protection is weaker than it looks. A seasoned attorney prevents that kind of mismatch.
The CPA’s Toolkit: Making Numbers Bond-Ready
A good bond underwriter can read between the lines of a balance sheet, but a strong CPA makes that exercise unnecessary. There are practical differences between a financial statement prepared for tax compliance and one tailored for bonding. The former might minimize taxable income, the latter should show accurate profitability and liquidity, even if that means reporting higher earnings in the short run.
The work-in-process schedule is the backbone. It should report contract value, costs to date, billings to date, estimated costs to complete, and the resulting over- Home page or under-billings. What separates adequate from excellent is reconciliation. The WIP roll-forward ought to tie to revenue, cost of revenue, and the balance sheet without unexplained plug amounts. If a surety analyst has to guess why gross profit improved on paper while cash shrank, the bond line will tighten or stagnate.
Capital structure and cash management get equal weight. CPAs can advise on converting short-term debt used for long-term assets into appropriately structured notes, which improves the current ratio without gimmicks. They can formalize retained earnings policies, so owners’ distributions do not drain working capital right before bid season. They can also help pull together supplemental schedules that underwriters ask for when the top-line numbers are not enough: aging of receivables with retention broken out, claims or change orders by job with probability-weighted collections, and a summary of unapproved change orders that reconciles to contract values.
There is judgment involved in deciding how aggressive or conservative to be on estimated costs to complete. Inflated profit fade in the last quarter of a project is a red flag to any surety. A CPA who coaches the project managers on forecasting discipline effectively raises the contractor’s bond capacity without borrowing a dollar. In practice, I have seen reductions in unbilled work and shrinkage in under-billings by 15 to 25 percent once a firm starts monthly WIP meetings with accounting and operations in the same room.
The Attorney’s Role: Aligning Risk, Papering Reality
Attorneys enter the picture early with the general indemnity agreement, but their ongoing value shows up in project-by-project contract terms and the contractor’s overall risk posture. A bonding company prefers contracts that allocate risk predictably. Few surety claims begin with catastrophic failure. Most start as a series of small problems that were contractually foreseeable but unaddressed: vague scope definitions, thin notice provisions, liquidated damages without a cap, or pay-if-paid clauses that shift too much risk downstream.
Contract review is not a generic task. The attorney should read with a surety lens. What triggers default? Is there a cure period? Do bond forms mirror the contract remedies, or do they expand liability? Are termination rights for convenience or cause drafted in a way that exposes the bond to a premature call? Counsel can often negotiate a defined notice process and a realistic opportunity to cure. That single change can mean the difference between a routine performance issue and a bond claim.
There is also the question of how the contractor is organized. Separate entities for equipment, real estate, and operations can be sensible for tax and liability purposes, but they can also weaken the indemnity supporting a surety program if the assets sit outside the operating company and the surety does not have a pledge or guarantee. An attorney working in tandem with the bonding company can design entity structures, intercompany leases, and guarantees that balance asset protection with surety comfort. The goal is not to hand the surety everything. It is to make sure that if the surety pays, there is a predictable path to reimbursement that a court will respect.
On troubled jobs, attorneys orchestrate the choreography of default letters, cure notices, and reservation-of-rights correspondence. The best outcomes occur when the contractor’s attorney and the surety’s counsel write as if a judge will read every word later. Ambiguity helps no one. Dates, contract sections, documented delays, and contemporaneous emails matter. If the surety needs to tender a replacement contractor or finance its principal to finish, those decisions rest on paper that stands up to scrutiny.
How the Three Parties Coordinate Day to Day
Healthy surety relationships do not live in emergencies. They develop over calendars and recurring touchpoints. At minimum, the bonding company expects quarterly internal financials and annual CPA-prepared statements, but the frequency of informal check-ins often drives confidence more than the thickness of the year-end binder.
A typical rhythm looks like this. The CPA releases year-end statements within 90 to 120 days of fiscal year-end, with a WIP that can be imported into spreadsheets for analysis. The bonding company reviews and sets or revises single and aggregate bond limits based on working capital, net worth, profitability, and backlog quality. If the contractor plans to bid a large job outside the normal range, the underwriter asks for a projected cash flow for the job and a summary of commitments. The attorney steps in if that job’s contract deviates from standard terms, or if the overall program requires revised indemnity to reflect growth, new affiliates, or a credit facility.
Communication is even more important in seasonal or cyclical businesses. A specialty contractor that takes on heavy summer backlog might borrow under a line of credit and collect retention in the winter. Sureties understand seasonality, but they dislike surprises. The CPA can help build a 12 to 18 month cash forecast that shows how retention releases interact with bank covenants. The attorney can review the bank’s security agreement to ensure the surety’s rights are not inadvertently subordinated. When lenders, sureties, and counsel all know the plan, the contractor gets more flexibility and less scrutiny when it matters.
Examples From the Field
A mid-sized sitework contractor I worked with had plateaued at a 10 million aggregate program. The company’s tax-oriented financials showed thin working capital, and the WIP consistently had large under-billings. Their CPA shifted them to percentage-of-completion with monthly close discipline, pushed for inventory controls on fuel and parts, and advocated for converting a revolver used to finance equipment into term debt. Within a year, under-billings dropped by roughly 40 percent, and the current ratio improved without any equity injection. The bonding company increased the aggregate to 18 million and the single job limit to 7 million because the risk of cash crunch mid-project materially declined.
In another case, a specialty subcontractor’s attorney negotiated a contract on a hospital project that initially included uncapped liquidated damages and a pay-if-paid clause with permissive setoff. The attorney secured a damages cap tied to 10 percent of the subcontract value, changed pay-if-paid to pay-when-paid with a defined outside date, and added a right to stop work for nonpayment after notice. Those changes did not eliminate risk, but they aligned it with what a surety can underwrite. The bonding company approved a performance and payment bond that otherwise would have been declined, and the project finished with normal change-order noise instead of a claim.
Not every story ends cleanly. A marine contractor entered a partnership with a new investor and created a holding company to own intellectual property and equipment. The ownership change triggered an anti-assignment clause in several existing contracts, and the new debt at the holding company came with a blanket lien. Because the attorney was brought in after the documents were signed, the surety’s indemnity became diluted. When a job later faltered, the surety faced a claim without clear recourse to key assets. It paid and later settled for a discount. That outcome could have been avoided with earlier alignment: carve-outs in the bank’s security agreement for surety collateral, consent from project owners to the ownership change, and a reaffirmation of indemnity from the new entity.
Underwriting Through the Cycle
Economic conditions shape surety appetites. During expansions, bonding companies tolerate thinner margins and lighter balance sheets if backlog is strong and owners pay on time. In a downturn, underwriters tighten standards. They scrutinize profit fade on older jobs, softness in private work, and exposure to distressed sectors. CPAs and attorneys can help clients stay bondable through the cycle by shifting from growth behaviors to preservation strategies before the market turns.
On the accounting side, that means conservative cost-to-complete estimates, earlier write-downs of doubtful change orders, and a sharper eye on receivables aging. On the legal side, it means insisting on clearer payment terms, escalation clauses where feasible, and avoiding contracts that disguise financing risk as performance risk. The bonding company appreciates candor more than bravado. If a contractor acknowledges a problem job early, presents a plan with financial and legal supports, and executes against specific milestones, the surety is far more likely to finance completion than to default and tender.
Claims: Where Roles Converge Under Pressure
When a claim hits, the theory of collaboration becomes practice. The bonding company will open a claim file, assign in-house or panel counsel, and request documents: contracts, change orders, project correspondence, schedules, pay applications, and accounting records for the job. The CPA can produce cost ledgers, job cost summaries, and reconciliations that separate disputed amounts from undisputed ones. The attorney evaluates default allegations, notice compliance, and termination rights, and then advises whether financing the principal, arranging for completion by a replacement, or tendering the project makes the most sense.
Timing matters. If the principal is still in possession of the site and the obligee has issued a notice to cure, the surety may prefer to finance completion to avoid the cost and delay of a tender. That decision relies on confidence in the contractor’s projected costs to complete, which is where CPA-prepared projections anchor the conversation. The surety’s counsel will structure a financing agreement with milestones, reporting requirements, and a mechanism to pay vendors directly. The contractor’s attorney will ensure the agreement does not create new defaults or waive rights unnecessarily. When all three parties stay aligned, even a messy dispute can end with the project delivered and the surety’s net loss minimized.
Documentation Standards That Build Trust
Bonding companies are patient with complexity, not with ambiguity. CPAs and attorneys can set documentation standards that make every renewal, consent request, or claim smoother.
Financially, monthly closes should be timely and repeatable. Job cost reports that roll up to the general ledger, consistent cutoff for payables and billings, and clear segregation of retention reduce misunderstandings. Budget-to-actual reports are not a luxury. They reveal whether profit fade is systemic or a one-off. A year-end review or audit from a CPA with construction expertise carries more weight than a compilation, not because the surety distrusts the contractor, but because the risk profile depends on the quality of estimates and controls.
Legally, a central repository for executed contracts, subcontracts, insurance certificates, and change orders will save days during a claim or a consent request. Standard forms vetted by counsel can accelerate business while keeping risk balanced. When unusual terms are necessary, a memo that explains the deviation and the protective measures taken helps the bonding company sign off with eyes open.
Expanding Bond Capacity: Practical Levers
Contractors often ask how to move from a 5 million program to 20 million within a year or two. There is no shortcut, but there are practical levers that CPAs and attorneys can pull in concert with the bonding company’s guidance.
- Clean up working capital: convert shareholder notes to subordinated debt with acceptable terms, fix short-term versus long-term debt classification, and formalize distribution policies. Improve WIP discipline: monthly updates, early recognition of profit fade, and tighter change-order tracking reduce surprises and lift confidence. Tune contract terms: secure defined notice and cure periods, cap liquidated damages where possible, and avoid unbounded indemnities downstream that can boomerang upstream. Address security conflicts: negotiate intercreditor agreements with lenders that acknowledge surety rights and avoid blanket liens that swallow indemnity. Sequence growth: align hiring, equipment purchases, and backlog intake with forecasted cash, so growth does not choke liquidity mid-season.
Each lever is incremental on its own. Together, they can double bond capacity because they address the underwriter’s core fears: surprise losses and trapped collateral.
Ethics, Transparency, and the Long Game
The three-party relationship depends on trust reinforced by numbers and documents. Hiding bad news is the fastest way to shrink a bond line. CPAs and attorneys serve their clients best when they advocate honestly. If a claim seems likely, say so early. If a bank covenant will be tripped without relief, get the surety and lender communicating before the notice arrives. Bonding companies invest in relationships that survive cycles. They will finance a principal through a tough job or a rough year if they believe the team tells the truth and executes their plan.
There are edge cases worth acknowledging. A contractor that shifts into a new scope, such as heavy civil to marine, might have excellent financials but limited relevant experience. The bonding company will lean on the attorney to verify licensing and contract compliance, and on the CPA to model what a different cash profile means for working capital. Another edge case is a joint venture. Surety appetite for JVs rises when the agreement clearly allocates control, cost sharing, and dispute resolution, and when both partners give indemnity in a form the surety accepts. Generic JV agreements, especially those that allow unilateral withdrawal or ambiguous loss sharing, lead to delays or declinations.
What Good Collaboration Feels Like
When the machine works, it feels calm. The contractor bids with confidence, the bonding company responds quickly to consent and bond requests, the CPA closes months on schedule, and the attorney resolves contract deviations without drama. Meetings are short because the dashboards and reports answer most questions. Problems surface early. The surety hears about a troubled job before an obligee issues a default letter, and the plan to fix it comes with dates and math, not just hope.
I have seen this dynamic at companies from 15 million to 300 million in annual revenue. Size helps, but habits matter more. Even a small firm can run a monthly WIP huddle, demand clean subcontract terms, and maintain a disciplined cash forecast. The bonding company will notice. Capacity will grow because capacity is a function of risk clarity, not just balance sheet size.
Final Thought
A bonding company’s job is to take measured risk on human performance. That is messy work. CPAs translate operations into numbers that a surety can trust. Attorneys translate promises into contracts that reflect how jobs actually unfold. When those translations are honest and timely, the surety steps in as a business partner rather than a gatekeeper. The result is not just more bonds. It is better projects, smoother cash cycles, fewer claims, and a contractor who can look at the next bid list with steady hands.