Aggregate Bond Capacity
Original post by Walter Johnson of Demand Media
Aggregate bond capacity (ABC) has nothing to do with buying or selling financial bonds, or loans. In this case, ABC refers to surety bonds offered by insurance firms to cover the actions of a contractor on a construction project. ABC does not refer to the amount of such lines of credit a firm might offer a contractor, but rather is the ability of a contractor to engage in his present workload.
When you hire a contractor to work on your home or business, many states and localities require that you take out a bond on him. This means that you are covered if the contractor does not complete the work, does shoddy work or gets in trouble for not following proper guidelines in the construction. From your point of view, it is an insurance contract. From the contractor's point of view, it is a line of credit.
When a contractor needs to get bonded to do a job, the process of applying can be a complex one. The insurance firm must do a background check on the contractor and some of his labor. They must look into the previous work of the contractor himself and ascertain if there has been any irregularities in the work, including cost overruns or firings. One of the central variables in covering the contractor is the amount of work he can reasonably be expected to do in a given year, quarter or month. This is called aggregate bonding capacity, or sometimes aggregate backlog.
From the insurance firm's point of view, they are insuring the ability of the contractor to get his future work done. Hence, the concept of ABC refers to how much the contractor can reasonably complete in a given amount of time. Contracting firms will often tell consumers how much aggregate capacity they have to work with, with the larger firms going into the hundreds of millions of dollars. This is a figure given to them by insurance firms. The concept is then that the insurance firm is telling the consumer that this particular contractor is capable of completing x number of projects -- measured in dollars -- in a given time period, such as a year of work.
The point of measuring ABC is to warn the consumer. If a contractor signs a contract with you to do work that is over his ABC, then you are treading on thin ice. The risk gets higher the more the contractor takes on, and in most cases, the contractor will not be covered by the insurance firm if something goes wrong. If he is covered, it will be at a high premium. Therefore, ABC is a measure of how good a contractor you are hiring. It is never recommended hiring a contractor if that means he will go over his ABC. Large, wealthy contracting firms with good reputations have large ABCs and low rates. A new, poorer individual starting his first firm will be bonded at very high rates and have a very low ABC until he proves himself.
- NorCal Insurance Services: Contractor Bonds
- Construction Executive; Surety Requirements 101: Best Practices to Guarantee Bonding; Karen Barbour; May 2011
- "Construction Guide 2008: Accounting and Knowledge-Based Audits"; Eric P. Wallace; 2008
- The Bond Exchange: Understanding the Importance of a Work-in-Progress Schedule
About the Author
Walter Johnson has more than 20 years experience as a professional writer. After serving in the United Stated Marine Corps for several years, he received his doctorate in history from the University of Nebraska. Focused on economic topics, Johnson reads Russian and has published in journals such as “The Salisbury Review,” "The Constantian" and “The Social Justice Review."