Sureties do not lend money. They underwrite character, capacity, and capital. When they look at a performance bond request, they read your cash flow like a cardiologist reads an EKG. Spikes in revenue look exciting, but erratic rhythms, negative operating cash in busy seasons, or chronic overdraft fees signal strain. If your goal is to expand your bonding capacity and secure approvals quickly at favorable rates, you have to manage cash flow with the same intention you bring to estimating, scheduling, and safety.
I have sat on both sides of the table, preparing contractor financials and presenting them to sureties, and I have seen good businesses choke because they failed to align billing, cost control, and working capital with what underwriters want to see. The following approach is not theory. It is the set of habits and decisions that consistently lead to stronger financials and smoother performance bond approvals.
What sureties actually analyze when you apply
Underwriters are trained skeptics. They respect clean numbers and conservative assumptions. When you submit for a performance bond, they pull your audited or reviewed financials, WIP schedule, bank statements, and near-term backlog. They walk through a simple set of questions.
- Will the company run out of cash if one or two jobs hiccup? Are profits real or a mirage of underbillings and aggressive cost-to-complete assumptions? Does management collect receivables quickly, bill on time, and pay subs responsibly? Is there bank support if the economy cools or project timing slips?
They translate those questions into ratios and trends: working capital and equity, operating cash flow, the ratio of billings to costs on the WIP, days sales outstanding, days payables outstanding, gross margin by job, backlog gross profit, and bank covenant headroom. If you want a higher single job limit or aggregate capacity, feed them numbers that make those ratios look sturdy, not stretched.
The heartbeat of bonding capacity: working capital and free cash
Sureties anchor on working capital because it absorbs shocks. Working capital quality matters more than the headline number. One dollar of cash in the bank is worth more than a dollar of inventory that turns twice a year or a dollar owed by a customer who argues every pay app.
What moves the needle:
- Cash and near cash, like Treasury bills or a clean, undrawn revolver with firm availability, count the most. Retentions receivable, stored materials, and claims are discounted heavily by underwriters. Subordinated shareholder notes sometimes help if they are deeply subordinated, long dated, and interest is paid in kind. Short, callable notes do not help.
If you manufacture or self perform, free cash flow depends on how you time your costs and billings. In construction, operating cash is shaped by the percent-complete method and the tug of war between underbilling and overbilling. On the revenue side, the more you bill ahead of cost, the more cash you hold. On the cost side, every day you pay subs and suppliers before you collect from the owner is a drain. The cure is not to abuse vendors or play games with owners. The cure is disciplined billing terms, accurate schedules of values, prompt pay app submission, and clean documentation so money moves to you without friction.
Underbillings, overbillings, and what they say about your discipline
Underwriters scan the WIP for chronic underbillings. A one-off underbilling that ties to a change order dispute is normal. A pattern of large underbillings across jobs suggests poor billing processes or cost overruns not yet recognized. Underbillings are assets on your balance sheet, but they behave like zero interest loans you have made to the owner. Too much of that and your working capital is hostage to a third party’s approval.
Overbillings, handled well, can be a cash flow advantage. They mean you are ahead on billings relative to cost. Carried too far, they can mask future losses if the remaining budget is unrealistic. When an underwriter sees heavy overbillings paired with thin remaining margin, they will stress test your WIP. If the numbers crack under scrutiny, your performance bond request becomes a risk they price up or decline.
A practical operating target that plays well with sureties: keep total underbillings under 10 to 15 percent of working capital and avoid job after job with overbillings that exceed the unearned gross profit remaining. It is not a rule carved in stone, but it shows you understand the cash implications and are not robbing tomorrow to pay today.
Billing sharper: schedules of values and the anatomy of a fast pay app
Cash moves to whoever does the paperwork best. I have seen contractors cut their days sales outstanding from 62 to 45 simply by cleaning up submission timing and backup. That 17-day improvement liberated hundreds of thousands of dollars, which directly reduced their need for bank borrowings.
A precise schedule of values helps you earn early billings on front-loaded tasks that legitimately occur early, like mobilization, submittals, shop drawings, bonds, and insurance. Owners and CMs often push back on front-loading because they do not want to pre-fund your float. You do not need to be aggressive. You do need to fairly capture early effort and cost. Include bonds and insurance as line items. Price preconstruction work if it is substantial. When you can, negotiate mobilization as a separate lump sum, paid upfront or at first application.
Submission timing is about rhythm. Identify the monthly cutoff, set internal deadlines several days earlier, and track the packet: cover page, continuation sheet, lien waivers, updated schedule, certified payroll if required, materials invoices, and photos. Missing one piece can delay an entire month of cash.
A controlled experiment from a drywall contractor we advised: they started delivering fully reconciled pay apps five business days before the CM meeting. Rejections dropped by half, and cash receipts came 10 to 12 days sooner on average. That single operational change was enough to push their operating cash flow positive for the year, which the surety noticed and rewarded with a 20 percent bump in single job capacity.
Change orders: revenue is not cash until it clears
Change orders are where margins are won or lost, and where cash often gets trapped. Underwriters discount pending change orders in the WIP unless they are fully executed. You can win the accounting argument that “approved in principle” should be recognized as revenue, but that will not win you a performance bond if the Swiftbonds cash trail is weak.
Operate on a simple ladder: request for change issued, pricing submitted, time and material tags collected daily and signed weekly, written authorization as early as possible, and pay app line added immediately once approved. On larger programs, establish a log that assigns a probability and a timeline to every change. Underwriters like to see that you score changes realistically. If your log shows many high probability items older than 60 days, they will press.
In practice, do not let small changes float. Bundle them monthly and push for blanket approval. For big changes, negotiate partial funding via allowances or interim approvals. If the owner’s process is slow, break the change into stages you can bill progressively. The goal is to keep your cost-to-cash cycle tight, so your working capital is not sunk into unbilled scope.
The hidden lever: subcontractor terms and pay-when-paid clauses
If you self perform 30 percent and subcontract 70 percent, your cash cycle rides on how you treat subs. Sureties do not want to see you starving subs to hoard cash. They do want to see contractual alignment that protects your working capital when owners pay late.
Use pay-when-paid language that is enforceable in your state and fair. It should permit reasonable delay in paying subs when the owner delays payment, but it should not be a shield for nonpayment when you are at fault. Offer early pay discounts to reliable subs when project cash is healthy. That small discount can lower your costs and build loyalty. Keep explicit records of conditional and unconditional waivers to avoid double payment risk, which can kill cash fast.
On supplier terms, ask for project-specific extended terms in exchange for commitments on volume or early release of purchase orders. Where feasible, release stored materials and bill them with proof of title transfer to the owner. This gets you cash before the materials are installed, which sureties view as good practice when documented correctly.
Banking relationships that help, not hurt, your bond request
A well-structured line of credit does not replace working capital, but it smooths short-term bumps. Underwriters are more comfortable when you have a committed revolver with clean availability based on receivables and, in manufacturing cases, inventory. They prefer few or no liens on contract rights that would prime them in a default. If your bank requires a general lien, negotiate specific carve-outs for bonded contracts or a standby intercreditor agreement with the surety.
Watch your covenants. A minimum tangible net worth test and a fixed charge coverage ratio are common. If you run thin on coverage because of seasonality, ask for a trailing twelve-month test or a springing covenant that only applies when draws exceed a threshold. Sureties read your monthly compliance certificates. A quiet breach is worse than an open ask for an amendment. If you foresee a covenant slip, talk to your bank and surety early. Transparency buys you options.
The monthly cash flow playbook that earns trust
Underwriters relax when they see a management team that anticipates cash needs and acts before a crisis. That shows up in simple routines:
- A rolling 13-week cash forecast that ties to your WIP and backlog. Update it weekly. Reconcile it to actuals and explain variances. Billing calendars by job, with expected approval dates and collection dates, which feed the forecast automatically once you discipline your team to update status. A capex gate: no new trucks or equipment purchases without payback analysis, floor of cash in the bank, and surety notice if material. Owner contact cadence: if a pay app slips past terms, someone calls, not just emails. A steady voice on the other end shortens delays. Tax planning that sets aside cash monthly. Getting surprised by a quarterly payment is a rookie mistake that spooks underwriters.
When a surety reviewer can flip through your forecast, see the logic, and match it to bank statements and job activity, your credibility rises. Credibility is currency in bonding.
Profit fades, punch lists, and the last five percent
The last dollars on a job cost more than they should. Punch work drags. Retainage hangs out there. If your field team lacks a finish strategy, cash gets trapped right when you need it for mobilizing the next job.
Build an internal rule: no more than a fixed small percentage of contract value should Swiftbonds services remain at substantial completion. That means pushing for retainage reductions tied to milestones, closing submittals fast, and telescoping closeout requirements into the body of the job instead of waiting for the end. Create a micro-schedule for the last 60 days with daily targets. Finish carpentry and commissioning burn cash quickly without visible progress if you are not deliberate. When your closeout is crisp, your DSO shortens and your free cash climbs. Underwriters who audit your pay histories will notice.
Tax strategy without starving cash
Aggressive depreciation reduces book income and taxes, which sometimes helps the surety narrative by pushing your equity and working capital higher net of tax. Yet there is an ugly edge case: if you use accelerated or bonus depreciation heavily and pair it with large shareholder distributions, free cash can go negative even though book equity looks healthy. Sureties dislike that combination.
Favorable in the underwriter’s eyes: a steady cash tax rate aligned with pre-tax profits, distributions limited to cover owner tax obligations and reasonable returns, and reinvestment in working capital during growth spurts. A simple policy that caps distributions as a percent of prior year net income, with exceptions requiring board approval, signals maturity.
Growth without overreach: funding backlog with eyes open
Winning a new, larger project feels like success, but it can be the riskiest moment for cash. Mobilization, bonds, insurance, pre-purchase of long-lead items, and ramp-up of payroll all hit before you see a dollar. If your performance bond approval hinges on this big win, prepare your cash narrative before you present it.
Lay out a project-specific cash curve: expected billings, retainage profile, vendor payment timing, and owner payment terms. Show how you will fund the initial hump with existing cash and revolver availability, and how cash turns positive by a certain milestone. If the cash curve stays negative for too long, reduce the hump. You can negotiate earlier billing milestones, request mobilization payments, split retentions over phases, or push for stored material billing. Sometimes you should pass on the job if the owner will not align terms. A single cash-hungry project can kneecap your entire program and scare your surety away from other approvals.
Cost-to-complete discipline: the WIP’s truth serum
If you systematically underestimate costs to complete, you will overstate revenue, understate underbillings, and fool yourself. Underwriters catch it the first time a profit fade shows up at job closeout. A track record of honest, conservative cost-to-complete estimates builds bonding capacity faster than almost anything else.
Run monthly job reviews led by operations, not just accounting. The PM should own the estimate to complete, with input from procurement and field leads. Compare current productivity against original assumptions. Adjust the ETC when you see drift, not when you feel comfortable explaining it away. Tie purchase orders to the ETC so uncommitted costs do not hide in the margins. The surety will study your WIP over several quarters. If gross profit recognized to date compares cleanly to final gross profit without chronic fades, they will credit you for strong controls and be more willing to support larger performance bond commitments.
Retainage strategy: money you own but cannot spend
Retainage is the quiet killer of working capital. At 5 to 10 percent, it compounds across jobs. Two levers matter: reduction and velocity. Reduction means negotiating lower retainage after specific milestones, often at 50 percent completion or upon acceptance of systems. Velocity means condensing the time from substantial completion to final payment.
Bring retainage to the negotiation early. Owners are more open to tailored retainage when you show a closeout plan and a strong track record of finishing clean. In some states and sectors, prompt pay statutes give you leverage. Use it politely. If the contract allows you to reduce retainage on subs in parallel with owner reductions, align that policy. Nothing fractures a project team like you releasing your retainage late while holding subs’ retainage longer than necessary.
Insurance, bonds, and the cost of risk
Your performance bond premium is not the only cost the surety evaluates. They look at your overall risk posture. High workers’ compensation losses or frequent GL claims drain cash through deductibles and premiums. The underwriter knows that an unsafe job is a slow job and a slow job consumes cash.
Invest in safety and quality because it protects people, but also because it improves cash and bonding. An EMR below 1.0 and a loss ratio that trends down will show up in both your insurance costs and the surety’s confidence. If you carry a large deductible program, ensure you reserve cash for claim payments, and disclose your reserve method. Surprises on deductible cash calls sour surety conversations fast.
Owner type, sector cycles, and how sureties weigh them
Not all dollars are equal. An A-rated healthcare owner that pays net 30 is not the same as a new developer who slips to 75 days when leasing slows. Sureties read your customer list and sector exposure. They discount cash flows that depend on a single owner or cyclic sector, especially if your contract terms are weak.
Balance your backlog mix when possible. If you lean into public work, budget for slower change order processing but steadier base pay. If you chase private work, squeeze for better terms and proof of funds. In the request package for a large performance bond, include owner references that speak to pay reliability, not just project satisfaction. A letter that says “this owner has paid within 30 to 35 days for three years” is gold.
Technology that matters and technology that does not
You do not need a fancy dashboard to run cash. You do need timely, accurate data. An ERP that integrates job cost, AP, AR, and WIP cuts the lag between field progress and financial reporting. Mobile time entry, daily reports with quantities installed, and photo documentation accelerate pay apps and change order proof. Document control that maintains submittals, RFIs, and correspondence in one place reduces disputes. Underwriters do not care about the brand. They care that you produce clean, consistent reports and that you can drill into the source quickly when they ask.
We helped a mechanical contractor move from spreadsheets to a mid-market ERP. The biggest win was not the dashboard. It was the ability to close the month in six business days with job-level gross margin and a reconciled WIP that tied to the GL. That speed let them adjust course mid-month and submit bond requests with fresher numbers. The surety responded with a higher aggregate program because they trusted the reporting cadence.
Governance, not bureaucracy
Small and mid-sized contractors sometimes flinch at the word governance. They imagine committees and delay. Good governance is lighter than that. It is a simple set of gates that protect cash.
- Commitments above a dollar threshold need a second signature. Any pay app over a given amount gets a peer review before submission. Weekly cash meetings include operations and accounting, not just the controller. A rainy-day cash floor sits in policy, and dipping below triggers a plan, not panic.
Underwriters do not need to attend your meetings. They just need to see that these practices exist and are followed. Minutes, checklists, and consistent financial packages do most of the talking.
Preparing the bond package with cash in mind
When you present a performance bond request, include a narrative that anticipates cash questions. The numbers matter, but the story pulls them together.
Outline the project’s billing terms, retainage, expected cash curve, and how you will cover mobilization. Attach a 13-week cash forecast that includes this job. Show bank availability and any cushion. Call out change order strategy and the owner’s reputation for pay. Note any subcontractor early pay programs or supplier terms secured. If you recently improved DSO or reduced underbillings, quantify the change. Underwriters appreciate managers who measure.
When to bring in your CPA and when to upgrade the report
For smaller contractors, compiled statements might have sufficed. Growth and larger bonds often require reviewed or audited statements. A review gives the surety limited assurance that your numbers are plausible. An audit examines controls and evidence and usually carries more credibility. If your jobs are complex or you carry large underbillings and overbillings, an audit pays for itself in reduced friction during bond underwriting.
The CPA’s role extends beyond issuing a report. Ask them to weigh in on revenue recognition, retainage presentation, and WIP disclosures that a surety cares about. They can help align your chart of accounts with industry norms, which speeds underwriting because the reviewer does not have to decode your categories. If you operate across states, the CPA can help you manage sales and use taxes that tend to surprise growing firms and drain cash.
A brief case story: turning negative operating cash into bonding strength
A sitework contractor with 45 million in annual revenue had strong top-line growth, but their operating cash ran negative three quarters out of four. Underbillings sat at 2.2 million. DSO was 68 days. Their surety capped them at a single job limit below what they needed to chase regional DOT work.
We started with billing discipline: restructured schedules of values to capture preconstruction services and mobilization, standardized documentation, and pushed submissions to five days before cutoffs. We created a change order log with status codes and owner contacts, then trained PMs to get weekly written confirmations for T&M work. We negotiated stored materials billing on two major projects and secured extended terms with the aggregate supplier in return for a volume commitment and automatic payments on the 20th of each month.
Results in six months: DSO down to 49 days, underbillings cut to 900 thousand, operating cash flow turned positive by 1.1 million, and the bank expanded the revolver by 500 thousand with a lighter covenant. The surety reviewed two consecutive quarters of clean WIP and stronger cash, then lifted the single job limit enough to let them bid the DOT work. Same crews, same estimator, different cash habits.
Common traps that derail performance bond approvals
- Rapid growth with thin working capital. Winning more than you can cash flow forces dependence on the bank. If availability is tight, the surety balks. Distributions outpacing profits. Owners pull cash in good months and leave the company short in the slow season. Underwriters see it in the equity roll-forward. Change order padding. Recognizing revenue without executed paperwork inflates margins and masks underbilling. The surety will discount it. Covenant breaches kept quiet. A surprise default letter from the bank freezes the surety. Raise issues early and document waivers. Sloppy closeout. Retainage and final pay drag for months, starving new jobs and sending you to the bank for working capital at the worst time.
What to do when cash tightens anyway
Even with discipline, you will run into tight weeks. Underwriters do not expect perfection. They expect control. If a large owner slips payment, communicate. Provide a revised 13-week forecast, note the specific invoices, and show the steps you are taking: drawing on the revolver, slowing noncritical capex, negotiating interim funding, or sequencing crews to match cash available. Avoid paying some subs and not others without a plan. Prioritize by lien risk and job impact, and document decisions. This is where a transparent, fair approach preserves relationships and satisfies the surety that you can steer through turbulence.
The long game: cash culture as competitive advantage
Cash discipline is not a quarterly campaign. It is a culture that teaches project managers to think in cash, not just cost and schedule. It insists that the field submits quantities and photos daily, not to create busywork, but to accelerate billings and change approvals. It treats subs as partners in cash health, not just cost centers to be squeezed. It asks finance to walk the jobs and operations to sit in cash meetings. When that culture takes root, your numbers start telling a consistent story. Sureties respond with confidence, approvals come faster, and premiums often tick down because your risk profile improves.
Performance bonds unlock work that can define a company’s trajectory. You do not control every variable in underwriting, but you control the clarity and strength of your cash flow. Build that strength deliberately. Bill tighter, forecast honestly, finish clean, and keep your working capital liquid and real. Do those things, and your performance bond capacity will follow.