Working capital is current assets minus current liabilities. A surety underwriter computes it from the contractor’s year-end statement, then removes assets it doubts will turn into cash, and multiplies what is left to set the aggregate bond program. The controller or CFO prepares the statement, and the bonding agent presents it.
That adjusted figure decides how much bonded work a contractor can carry at once. This post walks through the adjustments on an example balance sheet and converts the result into capacity, so a CFO can run the same arithmetic before the surety does.
What the surety counts
Chad Bell of the accounting firm CBIZ, writing in the Pipeline newsletter of the National Association of Surety Bond Producers (NASBP), lists the pieces. Current assets include cash, accounts receivable, inventories, underbillings and other current assets. For bonding purposes, current liabilities usually include debt and the current portion of debt, accounts payable, overbillings, accrued expenses and other current liabilities.
Underbillings and overbillings come straight from the work-in-progress schedule. Bell notes that sureties calculate working capital differently from one another, and that many focus on liquid assets and immediate liabilities.
The CPA firm Pease Bell names the assets underwriters commonly exclude. These come from Pease Bell:
- Accounts receivable aged beyond 90 days
- Related-party and officer receivables
- Prepaid expenses
- Inventory that has not turned over
- Intangible assets
Dan Huckabay of the Commercial Surety Bond Agency (CSBA) gives a shorter version of the same formula, which counts only cash and receivables under 90 days as current assets and only payables and bank debt as current liabilities.
A worked example
The figures below are an example with round numbers. A general contractor with $25 million in annual revenue closes its fiscal year with $6.0 million of current assets and $4.0 million of current liabilities. Its statement shows $2.0 million of working capital.
| Line | As reported | Surety-adjusted |
|---|---|---|
| Cash | $1,200,000 | $1,200,000 |
| Receivables under 90 days | $3,000,000 | $3,000,000 |
| Receivables over 90 days | $400,000 | $0 |
| Retainage receivable | $800,000 | $800,000 |
| Underbillings | $300,000 | $300,000 |
| Inventory not turned over | $200,000 | $0 |
| Prepaid expenses | $100,000 | $0 |
| Total current assets | $6,000,000 | $5,300,000 |
| Accounts payable | $2,500,000 | $2,500,000 |
| Overbillings | $900,000 | $900,000 |
| Current debt and line of credit | $400,000 | $400,000 |
| Accrued expenses | $200,000 | $200,000 |
| Total current liabilities | $4,000,000 | $4,000,000 |
| Working capital | $2,000,000 | $1,300,000 |
The surety in this example removes three items. Receivables over 90 days come out ($400,000), the whole $200,000 of inventory comes out because it has not turned over, and prepaid expenses come out ($100,000). Liabilities stay as reported. Adjusted working capital is $1.3 million, 35% less than the statement shows.
Retainage receivable stays in. Pease Bell advises contractors to keep it documented and current, and the retainage aging post shows how to track it by job and owner.
From working capital to capacity
Huckabay writes that sureties apply a multiple to working capital to find the maximum backlog they will bond, generally 10 to 20 times depending on the type of work. Pease Bell gives the same 10-to-20 range for aggregate capacity and says the multiple varies by surety, track record and type of work. The comparison runs against the cost to complete all backlog, bonded and unbonded, according to CSBA.
Say this contractor carries $11 million of cost to complete on its open jobs. That figure is the cost-to-complete column of the WIP schedule, summed.
| Multiple | On reported working capital | On adjusted working capital | Room left after $11M cost to complete |
|---|---|---|---|
| 10x | $20,000,000 | $13,000,000 | $2,000,000 |
| 15x | $30,000,000 | $19,500,000 | $8,500,000 |
| 20x | $40,000,000 | $26,000,000 | $15,000,000 |
At 10 times, the contractor reading its own statement would expect $20 million of capacity. The surety’s number is $13 million, which leaves $2 million of room. A new $4 million job would push cost to complete to $15 million, past the 10-times line and inside the 15-times line, so the multiple this surety applies decides whether the bid gets a bond.
The single-job limit follows a separate rule. CSBA describes the general practice as jobs within 1.5 to 2 times the contractor’s largest completed project, with some sureties going to 3 or 4 times. If the largest completed job in the example was $3 million, a $4 million bid sits inside that range.
Comparing your ratio to industry figures
Bell’s article uses Risk Management Association (RMA) benchmarks, compiled from financial statements that companies give their lenders, for NAICS 23622P, commercial and institutional building construction. From 2016 through 2025, working capital as a percentage of revenue rose from 8.3% to 17.8% for companies with $1 million to $10 million in revenue. For companies with $10 million to $50 million in revenue it rose from 7.6% to 12.1%.
The example contractor falls in the second group. Its reported working capital is 8.0% of revenue, and its adjusted working capital is 5.2%. Matching the 12.1% figure would take about $3.0 million of working capital on $25 million of revenue.
Bell offers two readings of the rise. Companies may be choosing to retain more capital, or they may need more capital to sustain the same revenue, and he lists Paycheck Protection Program cash, lower distributions and slower revenue growth among the possible causes. He also notes the trend does not hold for every construction sub-industry. Compare against the RMA group that matches your NAICS code and revenue band.
Moves that change the adjusted number
Collecting the $400,000 of receivables over 90 days leaves reported working capital unchanged, since one current asset turns into another. The adjusted figure rises to $1.7 million, and capacity at 10 times rises to $17 million. No other single step in the example adds as much, and the DSO post shows how to find those balances by owner.
Pease Bell’s other recommendations are to repay or document officer loans, avoid unnecessary year-end distributions, and keep long-term assets out of the current section. It also suggests a committed bank line of credit, since available liquidity beyond reported working capital reassures underwriters.
Backlog moves the other side of the ratio. The backlog in months post explains how to compute coverage, and ABC’s October Backlog Indicator gives the industry reading.
Small contracts and the SBA guarantee
The U.S. Small Business Administration guarantees bid, performance, payment and ancillary bonds that participating sureties write for small businesses that might not meet other sureties’ criteria. Eligible contracts run up to $9 million for non-federal work and up to $14 million for federal work. The business still has to meet the surety’s credit, capacity and character requirements.
SBA charges a guarantee fee of 0.6% of the contract price on performance and payment bonds, and no fee on bid bonds. On a $4 million contract, the fee is $24,000. The SBA size standard post covers how to check whether the company counts as small.
How to start on your books
Take last year’s balance sheet and the aged receivables report. Rebuild current assets in a spreadsheet with the five Pease Bell exclusions as separate lines, and compute working capital both ways. Then multiply the adjusted figure by 10 and subtract the cost-to-complete total from your latest WIP schedule.
If that remainder is smaller than the largest bid on your list this quarter, ask your bonding agent which multiple your surety uses and which adjustments it applied to last year’s statement.