Performance Bond Facility in Ontario: What is an Aggregate Limit?
Setting up a Performance Bond Facility in Ontario: What is an Aggregate Limit?
When a contractor works with their surety bond broker to first establish a performance bonding facility, part of their terms and conditions will be their facility limits. As part of these facility limits, they are presented with a single job limit and an aggregate job limit.
The single job limit is a basic concept in that it represents the largest single project that a surety bond company is comfortable supporting. This is usually based on the project experience of the team and largest completed previous project in the current corporate entity.
The aggregate limit however is a more novel concept. For most performance bonding facilities the aggregate limit represents the costs remaining on all outstanding work (bonded & unbonded) that a contractor has one the go at any given time. Below is an illustration of this concept.
Contractor A has a surety bond facility with a $5,000,000 aggregate limit and they are trying to figure out how much capacity they have remaining on that facility. They have three ongoing contracts. The first contract is $1,000,000 and is 75% complete. The second is $3,500,000 and is 50% complete and the final is a $500,000 contract that is 25% complete. The aggregate use here is as follows:
Contract 1: $1,000,000 multiped by the work remaining 25% = $250,000
Contract 2: $3,500,000 multiplied by the work remaining 50% = $1,750,000
Contract 3: $500,000 multiplied by the work remain 75% = $375,000
The current usage on their facility is $2,375,000 which leaves Contractor A with $2,625,000 remaining on their facility.
Understanding the aggregate limit, how this is established by the surety bond company and how to communicate where projects stand from a completion standpoint are critical to ensuring a contractor receives the bond support it deserves.
After explaining this concept to our clients, one of the most common questions we receive from them is
Why does my aggregate bond limit include both bonded and unbonded work?
The reason is that a surety bond company wants to see “over the fence” and monitor both the bonded and unbonded projects. In reality, if there is an issue on an unbonded project, contractors are tempted to take resources (personnel, equipment and capital) from bonded projects and move them to the unbonded project with issues. This process can have negative impact on the bonded work which is why the surety bond company monitors both.
Finally, one less common way a performance bond aggregate can be calculated is called a “Bonded Only” facility. This facility is typically applicable where a contractor does significant volume but only a very small proportion. Take for example, the general contractor that does $100,000,000 in private unbonded work and only $10,000,000 of that is bonded. Given how small this proportion is the surety can focus on the bonded portion and ease their required financial ratios vs. a $100,000,000 general contractor where $100,000,000 is bonded.