Construction Bonding! What do you know?

September 09, 2023

by a searcher from The University of Michigan - Stephen M. Ross School of Business in Grand Rapids, MI, USA

I'm under LOI with a water main installation and maintenance construction company that also does road construction projects. I'd like to learn more about the construction bonding process.

What are competitive bonding rates? What drives bonding rates?
What are minimum asset thresholds for competitive bonding rates? How much must be in cash on the balance sheet?
How do you effectively shop and evaluate bonding companies? What services should I expect from a bonding company?
What are major red flags in bonding, both from bonding companies and the seller's use/explanation of bonding at his construction company?

I'd love to set up a phone call with someone knowledgeable about bonding. Thanks!

Reply by a searcher
from Northwestern University in Dallas, TX, USA

Josh, I'm sure Chris can advise you well, but just wanted to share my personal experience. I started a commercial construction business and needed bonding for a project. Since we didn't have a track record and revenues were below a certain threshold, we were quoted 3% of the project value. Plus the company and I personally were on the hook to cover any costs or issues associated with the project. The bonding company would only pay to complete the project if/when all company and personal assets were depleted.

Reply by a searcher
from University of Texas at Austin in Dallas, TX, USA

Bonding is a major issue to solve when buying a civil GC. Bonding companies don't like seeing a lot of debt on the balance sheet, so it impacts the structure of the transaction. I would see who the current bonding company is and start there; they will be the most comfortable with the company. Make sure you understand the current bonding arrangement and if the seller signs a PG, the bonding company may want you to do the same.

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