Surety Bonding Glossary

 Surety Bonding Terms Defined

The surety industry uses specialized language that can be confusing if you are new to bonding or encountering a term for the first time. This glossary defines the most common surety bonding terms in straightforward language so you can understand what your bond agent, your surety, and your contract documents are telling you.

If you are looking for a term and do not find it here, call us at (801) 505-5500. We will explain it and add it to the glossary.

 A

Aggregate Limit. The maximum total amount of bonded work a contractor can carry at any given time, measured on a cost-to-complete basis. If your aggregate limit is $10 million and you have $7 million in active bonded work, you have $3 million in available capacity for new projects. Also called aggregate bonding capacity. See Building a Contractor Bond Program.

Audited Financial Statements. Financial statements that have been independently examined and verified by a CPA through detailed testing procedures. Audited statements provide the highest level of assurance and are typically required for large bond programs. See Financial Strength and Bonding.

 B 

Bid Bond. A surety bond submitted with a contractor's bid on a construction project. It guarantees that the bid is submitted in good faith and that the contractor will enter into the contract and provide the required performance and payment bonds if awarded the project. See Bid Bonds.

Bond Claim. A formal demand made against a surety bond by the obligee or another protected party (such as a subcontractor on a payment bond). The surety investigates the claim and determines the appropriate response. See Bonding for Construction Attorneys.

Bond Premium. The cost the contractor pays to the surety for issuing a bond. For contract surety bonds, the premium is typically 1% to 3% of the contract value based on the contractor's financial profile and risk factors. See How Much Do Contractor Bonds Cost.

Bond Program. An ongoing surety relationship that establishes pre-approved bonding capacity (single job limit and aggregate limit) based on the contractor's financial strength, experience, and track record. See Building a Contractor Bond Program.

BMC-84 Bond. The surety bond required by the Federal Motor Carrier Safety Administration (FMCSA) for licensed freight brokers and freight forwarders. The required bond amount is $75,000. See Freight Broker Bonds.

 C

Capital. One of the three C's of surety underwriting. Refers to the contractor's financial strength, including working capital, net worth, profitability, and cash flow. See Surety Underwriting.

Capacity (Underwriting). One of the three C's. Refers to the contractor's ability to perform the work being bonded, based on their experience, team, equipment, and current workload.

Character. One of the three C's. Refers to the contractor's reputation, credit history, communication patterns, and overall trustworthiness as evaluated by the surety.

Compiled Financial Statements. Financial statements organized and presented by a CPA in proper format without independent verification of the underlying data. The lowest level of CPA assurance. Acceptable for small bond programs.

Contractor License Bond. A commercial surety bond required by a state or local government as a condition of issuing or renewing a contractor's license. See Contractor License Bonds.

 E

 ERISA Bond. A fidelity bond required under the Employee Retirement Income Security Act for anyone who handles funds or property of an employee benefit plan. See ERISA Bonds. 

 F

 Fade. A decline in a project's projected profit margin over time. Significant fade across multiple projects on a WIP schedule is a red flag for surety underwriters. See Work in Progress (WIP) Reporting. 

 G

 General Agreement of Indemnity (GAI). The legal document signed by the contractor and all individual indemnitors when a bond program is established. It makes the signers personally liable for reimbursing the surety for any losses, costs, and expenses related to bonds issued under the program. 

 I 

 Indemnitor. A person or entity that signs the General Agreement of Indemnity and is personally liable for reimbursing the surety in the event of a bond claim. Typically includes all owners with significant equity in the contracting company. 

 L

 Little Miller Act. A state law that mirrors the federal Miller Act by requiring performance and payment bonds on state-funded and locally funded public construction projects. Thresholds and requirements vary by state. See The Miller Act. 

 M

Maintenance Bond. A surety bond that guarantees the contractor will correct defects in workmanship or materials for a specified period after project completion. See Maintenance Bonds.

Miller Act. The federal law (40 USC 3131-3134) that requires performance and payment bonds on federal construction contracts exceeding $150,000. In effect since 1935. See The Miller Act.

 N

 Net Worth. Total assets minus total liabilities. A measure of the overall equity in a business. Sureties use net worth as an indicator of long-term financial stability. 

 O

Obligee. The party protected by the surety bond. On a construction project, the obligee is typically the project owner. The obligee is the party that can file a claim against the bond if the contractor fails to perform. See The Three Parties of a Surety Bond.

Overbilling. Billing a project owner for more work than has actually been completed. Some overbilling is normal in construction, but excessive overbilling is a red flag for surety underwriters because it suggests the contractor is using project funds to finance operations.

 P

Payment Bond. A surety bond that guarantees the contractor will pay subcontractors, laborers, and material suppliers on a construction project. Required on public projects under the Miller Act and Little Miller Acts. See Payment Bonds.

Penal Sum. The maximum amount of the surety's liability under a bond. For a performance bond, the penal sum is typically 100% of the contract value.

Percentage of Completion (POC) Accounting. An accounting method that recognizes revenue and costs proportionally as work progresses on a project, rather than all at once when the project is complete. The accounting method most sureties prefer for bonded contractors.

Performance Bond. A surety bond that guarantees the contractor will complete the construction project according to the contract terms. See Performance Bonds.

Perpetuation Plan. A documented plan for how a contracting business will continue operating and completing bonded projects if the principal owner or key leadership becomes unavailable. Sureties require perpetuation planning because they need assurance that bonded projects will be completed. See Contractor Perpetuation Planning.

Principal. The party that is bonded. On a construction surety bond, the principal is the contractor. The principal is the party obligated to perform and the party that must reimburse the surety if a claim is paid. See The Three Parties of a Surety Bond.

R

Retention Bond.  A surety bond that guarantees the contractor will complete punch list items and correct defects during the retention period after substantial completion of a project. A retention bond allows the project owner to release retainage to the contractor before the retention period expires, improving the contractor's cash flow. The contractor posts the bond in exchange for early release of the retained funds. Also sometimes called a retainage bond. See Retention Bonds. 

Reviewed Financial Statements. Financial statements that have been examined by a CPA through analytical procedures and inquiries, providing limited assurance that the financials are free of material misstatement. The standard level of assurance for most mid-size bond programs.

 S

Single Job Limit. The largest individual project a surety is willing to bond for a contractor under their existing program. Also called single bond limit or per-project limit.

Surety. The company that issues the bond and guarantees the contractor's performance. The surety is the third party in the three-party bond relationship, alongside the principal (contractor) and the obligee (project owner). See The Three Parties of a Surety Bond.

Surety Bond. A three-party financial guarantee in which the surety guarantees to the obligee that the principal will fulfill a specific obligation. Unlike insurance, the surety expects zero losses, and the principal is liable for reimbursing the surety if a claim is paid. See What Is a Surety Bond.

T

Three C's. The three areas surety underwriters evaluate when assessing a contractor: Capital (financial strength), Capacity (ability to perform), and Character (reputation and trustworthiness). See Surety Underwriting.

Treasury List (Circular 570). The U.S. Department of the Treasury's list of surety companies approved to write bonds on federal projects. Many state and local governments and private project owners also require sureties to be on this list.

U

Underbilling. Completing more work than has been billed to the project owner. Underbilling means the contractor has funded work from their own capital that has not yet been recovered through billings.

Underwriting. The process a surety uses to evaluate a contractor's financial strength, experience, and character to determine whether to issue a bond, how much capacity to extend, and what terms to offer. See Surety Underwriting.

Underwriting File. The complete package of documents submitted to the surety for evaluation. Includes financial statements, personal financial statements, WIP schedule, completed project list, bank references, and company information. See Building an Underwriting File.

 W

Work in Progress (WIP) Schedule. A financial document listing every active project with the contract amount, costs to date, billings to date, estimated cost to complete, percentage of completion, and projected profit or loss. A required part of the surety underwriting file. See Work in Progress (WIP) Reporting.

Working Capital. Current assets minus current liabilities. The primary metric sureties use to calculate bonding capacity. Many sureties use a working capital multiplier (10x to 15x) to set the contractor's aggregate limit. See Financial Strength and Bonding.