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Bonding Capacity

What is bonding capacity? It's essentially the maximum value of work that a surety company allows a contractor to have on hand at one time. For instance, if a contractor is bonded for a million dollars, that contractor can not have more than 1 million in uncompleted work and still be legally represented by the bond purchased from the surety company.
How is bonding capacity set?
There are many different methods to do this but as a rule it's a function of the following items:
Company Net Worth
Company Liquidity
Volume of Work
Retainage on all jobs
Type of Work
Contract Duration
Essentially it comes down to what the company can liquidate when there is a need to call in a bond. Typically, the bond will also be setup to not allow the contractor to have one contract shall exceed a certain percentage of the total current work.
What does a bond do for me?
Essentially if a contractor has to assume a debt, defaults on something, or has a failure in duty the bond will cover it - depending on the type of bond required. I shouldn't say that the bond will cover it - but will extend credit to the contractor to cover it. Nothing is free.
Types of Bonds
There are several types of bonds that may or may not be required for a contractor. Requirements are usually set forth by the contract entered into. The main ones that a contractor could see would be:
Performance Bond
Payment Bond
Labor and Material Bond
Subcontract Bond
Maintenance Bond
There are many more types but would only be required in special circumstances.