Blog

Securing a surety bond in today’s competitive construction landscape is about more than just meeting legal requirements. Surety underwriters want clear evidence of your business’s financial strength, operational stability, and ability to manage risk.

For emerging and midsize construction firms, this means focusing on five critical financial metrics, known as key performance indicators (KPIs). Here’s what these metrics mean, why they matter, and how you can improve them.

1. Working Capital vs. Backlog
What It Measures: This metric compares your working capital (current assets minus current liabilities) to your committed backlog, which is your remaining contracted work. It reveals if you have enough short-term liquidity to handle upcoming projects.

Why It Matters: Sureties need confidence that you can meet your financial obligations without cash flow issues. A higher ratio signals that you have the flexibility to pay subcontractors, manage delays, and handle any cost overruns.

How to Improve It: You can enhance your working capital by invoicing promptly to accelerate your receivables and by negotiating payment terms to better manage your payables. Improving project cost accuracy will also help you avoid shortfalls and ensure you’re in a favorable position when presenting to a surety.

2. Debt vs. Net Worth
What It Measures: This ratio shows how much you rely on borrowed funds versus your equity. Lower leverage (less debt) signals that you are financially stable.

Why It Matters: High debt makes sureties nervous. They want to see that you’re not overextended and can weather setbacks without financial strain.

How to Improve It: Reducing your interest-bearing debt and refinancing existing loans at better rates can immediately improve this metric. Retaining earnings so you can build equity also strengthens your balance sheet and demonstrates a healthier capital structure.

3. Net Profit
What It Measures: Net profit is what’s left after all of your expenses are covered. Positive, consistent profits prove your business runs efficiently.

Why It Matters: Sureties look for firms with reliable earnings. Strong profits show you can absorb unexpected costs and still meet your commitments.

How to Improve It: To boost net profit, focus on controlling your costs through regular expense reviews and by streamlining operations. Negotiating better supplier pricing can also protect your margins and improve your profitability.

4. Underbillings vs. Working Capital
What It Measures: Underbillings — your work completed but not yet invoiced — can tie up liquidity. Comparing this figure to your working capital highlights potential cash flow bottlenecks.

Why It Matters: Excessive underbillings signal delays in converting work into revenue, which raises red flags for sureties.

How to Improve It: Streamline your billing process by consistently meeting your invoicing milestones and by improving project oversight so you can spot delays early. Clear documentation can help you avoid disputes that might hold up payments, ensuring a smoother cash flow.

5. Jobs With Profit Fade
What It Measures: Profit fade happens when final project profits fall short of initial estimates. This situation could point to issues with project management, cost estimation, or unforeseen challenges.

Why It Matters: Sureties want to see accurate forecasting and solid project controls. A low profit fade ratio shows you consistently hit your targets.

How to Improve It: Strengthen your estimating processes to reflect realistic costs and contingencies while improving your cost controls through better monitoring and reporting. Assigning experienced managers to oversee high-risk projects can also ensure tighter oversight and more predictable outcomes.