What Sureties Look For in Contractor Financial Statements

When your financial statements land on a surety underwriter's desk, they get read differently than by anyone else who sees them. Your banker asks whether you can repay a loan. The IRS asks whether you reported income correctly. A surety asks a harder question: if this company takes on another $2M of bonded work, will it finish every job — and survive the ones that go wrong? Everything an underwriter does with your statements flows from that question. We covered the moves that raise your bonding capacity separately; this article is about the reading itself — what underwriters look at, in what order, and what makes them lean in or walk away.

The Package They Expect to See

Underwriters want CPA-prepared, accrual-basis financial statements built on the percentage-of-completion method — a balance sheet, income statement, statement of cash flows, and footnotes, supported by a schedule of open jobs (the WIP), a schedule of completed contracts, and a breakdown of general and administrative expenses. The level of CPA involvement matters: a compilation carries no assurance, a review carries limited assurance, and an audit carries the most. Small bond programs can sometimes run on a compilation, but as your program grows most sureties want at least reviewed statements, and stepping up a level is often part of what unlocks a bigger line. Timeliness is itself a signal: year-end statements delivered within a few months of close say something about your back office that no ratio can.

One thing they are explicitly not asking for is your tax return as the main exhibit. Your return can legitimately sit on a deferral method — completed contract or cash under the small-contractor rules of IRC §460 — while your statements stay on percentage of completion. Sureties understand the difference; what they won't accept is tax-basis or cash-basis statements as the only picture of the company. We walk through running the two views side by side in percentage of completion vs. completed contract.

How They Read Your Balance Sheet

The first stop is working capital — current assets minus current liabilities — but not the number as printed. Underwriters compute an *adjusted* figure, and the adjustments are where contractors lose capacity without realizing it. Common discounts:

• Related-party and employee receivables — often excluded entirely, since money the company lent its owner isn't available to finish a troubled job.
• Aged receivables — balances aging past roughly 90 days are frequently discounted or removed.
• Prepaid expenses and inventory — hard to turn into cash mid-project, so often haircut.
• Underbillings — counted skeptically, for reasons the WIP section below makes clear.

After working capital comes equity and leverage. Retained earnings that stay in the company year after year tell an underwriter the owner treats the business as something to build; a balance sheet stripped bare by distributions every December tells them the opposite. Debt-to-equity gets checked, and shareholder loans get scrutinized in both directions — a loan *to* the owner weakens the picture, while debt owed to the owner may be treated more like equity if it's formally subordinated to the surety.

The WIP Schedule Is the Main Event

Ask underwriters what they read first and most will say the work-in-progress schedule. The WIP shows every open job's contract value, costs to date, estimated cost to complete, earned revenue, and billings — and from those, the two numbers sureties care most about: overbillings and underbillings.

Overbillings — billing ahead of the work — generally read as billing discipline, and they're a normal feature of a healthy contractor. The follow-up question is whether the cash behind them is still there or has quietly funded the next job. Underbillings — work performed but not yet billed — get the opposite reception. Sometimes they're innocent timing, but experienced underwriters know they're often where problems hide: unapproved change orders being carried as an asset, cost overruns nobody has re-estimated, or profit booked faster than the job is earning it.

The other thing the WIP reveals is profit fade — jobs whose estimated gross profit shrinks from one statement to the next as reality catches up with the original estimate. One fading job is a conversation; a pattern of fade across the schedule is, to an underwriter, evidence that the company doesn't know what its jobs will cost — and that every estimate on the page deserves a discount. Fade in reverse (profit gain) sounds better but raises its own flag: it suggests sandbagged estimates, which also means the numbers can't be taken at face value. What builds trust is a WIP whose estimates hold.

The Income Statement, Cash Flow, and Footnotes

On the income statement, underwriters look for steady gross margins year over year, overhead that scales sensibly with revenue, and net income that actually stays in the company. On the cash flow statement, they want operations — not borrowing — generating cash. The footnotes get read, not skimmed: backlog, related-party dealings, debt terms and maturities, contingencies, and claims all live there. Beyond the statements, most underwriters weigh the surrounding facts — an unused bank line of credit, a continuity plan for the company if something happens to you, personal financial strength behind the standard indemnity agreement, and a track record of completing jobs the size you're now asking to bond.

Red Flags That Shrink a Program

• Profit fade across multiple jobs on consecutive WIP schedules.
• Large or growing underbillings, especially alongside thin cash.
• Distributions that strip out most of each year's earnings.
• Receivables aging past 90 days, or big related-party balances.
• Cash-basis or tax-basis statements offered as the only financials.
• A WIP schedule that doesn't tie to the income statement.
• Statements that show up months late, or change after delivery.

None of these is automatically fatal — but each one either shrinks the program a surety will write or raises the scrutiny on everything else in the file.

Getting Surety-Ready Before You Need to Be

Everything above is buildable. A monthly close, a WIP schedule that ties to the general ledger, job-cost estimates that get re-forecast honestly, and CPA statements at the right assurance level are the normal output of a disciplined construction accounting function — and they're exactly what lets an underwriter say yes quickly. The balance-sheet side — how much profit to retain, how to structure owner loans, how your tax method interacts with the statements your surety reads — is tax strategy and advisory work, and it's most valuable *before* the bond request, not the week of. If bonded work is part of your growth plan, our plans are built around keeping contractors surety-ready year-round. Let's look at your statements the way an underwriter will — before one does.