Illinois Construction Bonds: Secured vs. Unsecured and Their Accounting Impact

Construction bonds are a routine part of public and private projects across Illinois, yet the differences between secured and unsecured bonds — and how they affect accounting — are often misunderstood. This article breaks down what those bond types mean, when each is used, and how they change cash flow, balance sheet treatment, project cost tracking, and compliance reporting. Practical challenges and best practices for contractors will also be covered, along with a look at how Construction Cost Accounting (CCA) systems can streamline the process.

Bonding requirements in construction protect owners, lenders, and subcontractors by shifting risk and guaranteeing performance or payment. Illinois follows the same broad practices as other states but includes specific statutory obligations for public work and common local procurement rules. For contractors, the choice between secured and unsecured bonds — or the need to combine multiple instruments — has immediate accounting consequences.

Understanding those consequences matters beyond financial statement preparation. Bond type affects working capital needs, indemnity arrangements, reporting to bonding companies, and how job costs are allocated. Digging into the differences helps finance teams, project managers, and owners make informed decisions that keep projects solvent and compliant.

Understanding Construction Bonds in Illinois

Definition & Purpose

Construction bonds are surety-backed guarantees that an obligation will be met: most commonly that a contractor will complete a project per contract terms (performance bond) or pay suppliers and subcontractors (payment bond). In Illinois, public projects often mandate both performance and payment bonds under the Illinois Public Construction Bond Act and local procurement rules.

Beyond guaranteeing performance and payment, bonds serve as a risk allocation tool. The surety provides a financial backstop while the contractor retains operational responsibility. If the contractor defaults, the surety may step in to complete the work, pay claims, or negotiate settlements.

Types of Bonds Common in Construction

The common construction bonds include bid bonds, performance bonds, payment bonds, maintenance bonds, and subdivision bonds. Bid bonds assure the bidder will enter into contract if awarded; performance bonds ensure contract completion; payment bonds protect against unpaid vendors; maintenance bonds cover defects during warranty periods; subdivision bonds guarantee infrastructure installation in land development projects.

Each bond type addresses a different phase and risk of construction. For accounting, the most impactful bonds tend to be performance and payment bonds because they directly relate to cash flow and liability recognition on long-term projects.

Secured vs. Unsecured Construction Bonds

Secured Bonds

Secured bonds are backed by specific collateral or credit support pledged by the contractor. Collateral might include cash, letters of credit, real estate, or a trust account earmarked for the project. When a surety requires security, it shifts the risk of a default back onto the contractor’s assets rather than the surety’s balance sheet alone.

From a surety’s perspective, secured bonds reduce exposure and are often required for new contractors, high-risk projects, or when a contractor’s financial ratios fall below underwriting thresholds. For the contractor, collateralized bonds can mean frozen cash or restricted assets until the bond obligation is satisfied or the project reaches certain milestones.

Unsecured Bonds

Unsecured bonds — sometimes called unsecured underwriting or clean bonds — do not require specific collateral. Instead, the surety relies on the contractor’s balance sheet strength, credit history, experience, and relationships. Unsecured bonds are common for established contractors with strong financial statements and a proven track record.

While unsecured bonds free up assets, they often come with stricter covenant monitoring, higher scrutiny on liquidity metrics, and more frequent reporting to the surety. In the event of a default, the surety may pursue indemnity claims against principals, but the contractor’s operating cash remains available until such a claim crystallizes.

When Contractors Typically Use Each Type

New or financially constrained contractors frequently accept secured bonds to win work while they build a track record. Large public projects or contracts with significant retention may also trigger secured requirements. Conversely, established firms use unsecured bonds to preserve liquidity and scale operations faster.

Project owners and public agencies may insist on secured instruments for particularly risky scopes or when statutory protections are incomplete. The decision is typically an interplay of underwriting rules, project size, contract terms, and the contractor’s appetite for tying up assets versus maintaining liquidity.

The Accounting Impact of Bond Type

Cash Flow Considerations

Secured bonds often require cash collateral, letters of credit, or pledged assets. When cash is tied up as collateral, available operating liquidity falls, and the contractor must plan for reduced working capital. This can increase borrowing needs or delay payments to suppliers, which in turn affects relationships and potentially leads to liens or claims.

Unsecured bonds preserve liquidity in the short term but can create sudden cash demands if a default occurs and the surety seeks indemnity payments. In both cases, forecasting cash flow under multiple scenarios — including partial completion, cure costs, and legal settlements — becomes essential to avoid insolvency risks during a claim event.

Balance Sheet Treatment

Collateral pledged for a secured bond remains an asset on the contractor’s balance sheet but may be classified as restricted cash or a long-term receivable depending on the purpose and duration of the restriction. Disclosure notes should explain the nature and amount of restricted assets tied to surety obligations.

Unsecured bonds do not result in restricted assets but can trigger off-balance-sheet contingencies. Potential liabilities from indemnity agreements should be disclosed under contingent liabilities if a loss is probable and estimable. Proper classification ensures stakeholders understand both the direct and indirect financial impacts of bonding arrangements.

Project Cost Tracking

Secured bonds can change how costs are allocated between project-level accounts and corporate reserves. For instance, warranty reserves or retention funds held in trust may need to be tracked separately from standard job costs, affecting gross margin calculations and profitability analysis.

Accurate job-cost tracking is critical for both bond types because cost overruns, change orders, and delay claims drive bonding exposure. Construction accounting systems should allow for job-level buffers and contingency tracking so that project managers and finance teams can reconcile expected versus actual costs and report variances timely.

>> Read more: Are Surety Bond Costs Tax Deductible for Contractors?

Compliance Reporting

Bonding companies typically require periodic financial statements, project updates, and compliance certificates. Secured bonds often add administrative requirements, such as proof of collateral sufficiency and documentation of restricted accounts. Missing these reports may trigger bond call or increased collateral demands.

Unsecured bonds may require more frequent covenant testing and covenant compliance reporting. Accurate, audit-ready accounting records help contractors satisfy surety reporting and reduce the risk of adverse underwriting actions that could limit future bonding capacity.

Common Challenges Contractors Face

Contractors often struggle with mismatches between project cash cycles and collateral requirements. Large public contracts with long payment cycles can create a strain when collateral is demanded up front or retained during extended warranty periods. This frequently leads to reliance on lines of credit with higher carrying costs.

Another common issue is transparency and timing of reporting. Small accounting teams can be overwhelmed by the volume of documentation requested by sureties, owners, and lenders. Inadequate job cost controls, delayed invoicing, and poor change order documentation inflate perceived risk and can reduce bonding capacity or push contractors into secured arrangements.

Finally, indemnity provisions in surety agreements create long-tail exposures for owners and principals. Understanding the legal and financial implications of personal indemnity versus corporate indemnity is important when evaluating bond offers and when negotiating the corporate governance around bonding decisions.

Best Practices for Contractors in Illinois

Establishing robust cash management and forecasting processes reduces the need for collateralized bonds. Regular cash flow stress testing — including scenarios for delayed payments, back charges, and defects — helps identify when unsecured bonding is sustainable or when additional liquidity will be needed.

Maintaining clean, job-level accounting records, timely billing, and clear change order documentation improves perceived creditworthiness. Investing in standardized compliance packages for sureties (monthly reports, job updates, aging schedules) streamlines underwriting and may lower collateral demands.

Engaging a bonding-savvy CPA or financial advisor can also be valuable. These professionals can help structure restricted accounts appropriately, advise on tax and reporting treatment of escrowed funds, and negotiate financial covenants with lenders and sureties to optimize bonding capacity.

How Construction Cost Accounting (CCA) Can Help

Construction Cost Accounting systems centralize job-cost data, automate compliance reporting, and produce audit-ready financial statements that sureties prefer. Integration with project management and procurement platforms reduces invoice lag and provides near-real-time visibility into margins, change orders, and retention balances.

Advanced CCA solutions enable scenario modeling for secured versus unsecured bonds by linking cash flow forecasts to collateral requirements and funding timelines. This allows finance teams to simulate the impact of a bond call or the effect of pledging a letter of credit, which supports better negotiating leverage with sureties and owners.

Automated reporting also reduces administrative burden. Generating standardized monthly compliance packs for sureties — including updated balance sheets, aging receivables, retained percentages, and project status summaries — typically accelerates underwriting decisions and helps maintain unsecured status where justified.

Conclusion

Secured and unsecured construction bonds each have distinct accounting and operational consequences. Secured bonds provide sureties with protection at the cost of restricted assets and tighter cash management for contractors. Unsecured bonds preserve liquidity but require stronger financials and rigorous reporting to minimize the risk of indemnity demands.

For contractors in Illinois, careful planning, strong job-cost accounting, and proactive communication with sureties and lenders are essential. Construction Cost Accounting systems and professional financial advice can improve bonding outcomes and reduce the probability of disruptive collateral calls or contract disputes. Ultimately, aligning bonding strategy with corporate finance policy and project-level realities protects margins, maintains relationships, and supports sustainable growth.