Surety Bond Education

How Does My Surety Analyze My Financial Statement

We had the privilege of writing an article in the July issue of the Austin Construction News.  You may find it here.

And re-posted below

How does my Surety analyze my Financial Statement?

Your surety company is going to evaluate creditworthiness based on three broad areas: character, capacity, and capital.  Capital represents your financial strength as a contractor and is documented by providing ongoing financial information to your underwriter.

As if preparing accurate financial statements wasn’t hard enough given all it takes to run your business, it’s important we understand that these financial statements are ‘analyzed’ by your surety. The surety works to evaluate what assets can be viewed with a high degree of confidence and weed out those that have some degree of risk or uncertainty.  The goal is to base your surety credit on viable assets and balance conservatism with trying to understand the makeup and risk attributes of the assets and liabilities.

Your financial statement as provided is described by “as-stated” and upon completion of analysis it is described by “as-allowed”.  The analysis process looks at each asset entry and scrutinizes whether it should be discounted by some percentage of stated value, counted but viewed as a non-current asset (allowed in equity but not working capital) or disallowed entirely. Taking a conservative approach in underwriting typically means that all liabilities are allowed “as-stated”. This will often include an added entry for anticipated tax distributions due on profits for entities reporting tax as a pass-through.

Below I will list some common assets entries found on a contractor’s balance sheet and how they’re typically treated by a surety.  Keep in mind each surety company has their own unique methods of analysis and treatment of assets.

Cash. Cash is fully allowed as a current asset unless it is described as restricted or pledged as collateral.

Marketable Securities. If securities such as stocks are publicly traded and at risk of market volatility, some percentage of stated value will be disallowed entirely.  Often 20% or more.

Accounts Receivables aged 90 days or more.  Generally, receivables over 90 days are not allowed. If you feel there are reasons that provide for more confidence in collection, I recommend providing that information to your underwriter. Retention receivable is allowed at full value.

Claims receivable. This asset is typically excluded entirely given the uncertain nature of the negotiation and legal process involved. If there are agreements or resolutions in place, I would recommend providing that information to your underwriter to make a case for allowing at least some portion of the receivable. A case can also be made to disallow related payables, so communication is key here.

Underbillings. Underbillings (cost and estimated earnings in excess of billing) are allowed at full value unless they are reflective of unresolved contract claims or change orders.

Officer/employee account or note receivable. Unless there is collateral or security in place held by the company, these transactions are excluded. It is fairly customary that this type of transaction is not paid by outside funds rather they are often resolved by reclassifying the entry as salary.

Account or note receivable due from Affiliated company. Unless security or collateral is in place and a financial statement is reviewed to support the ability to repay, these items are fully disallowed.

Inventory. Often inventory will be analyzed by discounting 50% from current assets but allowing in equity. If a case can be made that the inventory will be used or turn over quickly, I recommend providing additional detail to your underwriter as this can have a significant impact on your working capital calculation.

Investment in other/outside companies. By default, a conservative approach will be taken when analyzing these investments so it is important to provide additional supporting information as to why an investment should be allowed in analysis. Often, we see investments like this noted on the balance sheet as equity or cost basis in the investment which fails to take into account any off-balance sheet liabilities for which the principal contractor may be responsible.

Keep in mind these are just a few common balance sheet asset entries we see in the construction industry but there are plenty more and each individual case is unique.  It’s important to maintain transparency and communication with your bond agent and underwriter on the details of these transactions.  If a case can be made to allow all or some of an asset in analysis of working capital and/or equity, it means more total bonding capacity can be supported!

Schmalz & Associates is an agency exclusively supporting contractors bonding needs. Eric Schmalz was an underwriter and manager for over 15 years working for Top 10 surety companies and now helps his contractor clients establish and maximize their bonding.  Please call 512-640-6444, email or visit the website at

We’d love to help!

Link to Austin Construction News July issue

More Information


Get a Free No-Obligation Surety Bond Quote

Get Started