Secrets of Bonding

The confusion is amazing.  Why is this subject so mysterious and perplexing for many professionals?

Let’s start with something really simple: What is “Work On Hand” for a construction company? 

This is a crucial question because when you get bid and performance bonds, there is always an aggregate capacity limit, which is calculated using the Work On Hand (WOH).  So you MUST know how to figure it.

Do you see the correct definition?

1. The incomplete portion of all bonded projects
2. The incomplete portion of all projects
3. The unbilled portion of all bonded projects
4. The unbilled portion of all projects
5. All contract costs
6. Contract price minus costs
7. Original contract price minus costs incurred to date
8. Contract price minus approved (by architect or owner) billings
9. Contract price (including change orders) minus current estimate of total costs
10. The sum of open (undecided) bids plus the unbilled portion of all projects

You like them ALL?!  They sound pretty good, but unfortunately… none are correct.  The bonding definition (that’s used throughout the industry) is based on the accountant’s approach.  It’s mysterious. And only one answer makes sense and is correct.

Dive In

If you have followed our articles, you know that billings are not part of the answer, even though many contractors like to use this approach.  They may choose #4 “The unbilled portion of all projects” because of their need to monitor cash flow.

To rely on this approach, you must depend on the project owner to PAY CORRECTLY based on the degree of completion.  In other words, when you are 50% complete, you should be paid 50% of the contract amount. To continue this fallacy, therefore, when you make your last billing to reach 100% of the contract price, you must be complete with the actual work.

The problem is that the project owner does not know the cost of the remaining work, which defines the degree of completion.

Challenging question: How reliable would it be to use billings to determine the WOH if the project was unprofitable? (costs exceed the contract amount)

The Truth Revealed

Accountants tell us that the degree of completion and the remaining WOH are defined by costs.  The reason? It is because regardless of the state of the billings, the project is not complete until there are no more costs left to incur.  When the job doesn’t need one more brick or hour of labor, it is 100% complete.

The Secret Formula

WOH consists of the following:

• Current estimated costs to complete on all projects, plus
• The full amount of new contracts just started, plus
• The full amount of undecided bids and contract proposals

Beguiled no more! If a contractor says “The job is going well. We are already 60% billed!” You say “Great, are your cost projections within budget?”

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision, Bid and Performance Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.