Posting Bond in Illinois: Secured vs. Unsecured Bonds

Understanding the difference between secured and unsecured bonds is essential for contractors working in Illinois. The choice affects cash flow, accounting entries, procurement timelines, and compliance with state or owner-mandated requirements. This article explains what “posting a bond” means in the construction context, compares secured and unsecured bonds, explores factors that determine which type is needed, and details accounting and tax implications. Practical best practices and the role of Construction Cost Accounting (CCA) complete the picture, helping contractors plan financially and protect margins on public and private projects.

Construction bonds are more than paperwork — they are financial instruments that guarantee performance, payment, or both. In Illinois, public projects and many private owners require bonds to ensure that subcontractors and suppliers get paid and that projects are completed according to contract terms. Bonding protects the owner, but it also places obligations on the contractor that affect working capital, balance sheet risk, and relationships with sureties.

This article is aimed at contractors, project managers, and accounting professionals who need to decide whether to post a secured or unsecured bond and to manage the financial consequences. Accurate accounting, timely financial reporting, and proactive discussions with surety partners reduce surprises and help projects move forward smoothly.

What Does “Posting a Bond” Mean in Construction?

Posting a bond means securing a guarantee from a surety company to back a contractor’s obligations under a construction contract. The bond is a three-party agreement: the principal (contractor), the obligee (owner or government entity), and the surety (insurance-like company). If the contractor fails to perform or pay subcontractors, the surety must step in to remedy the breach, either by completing the work or by paying claims up to the bond amount.

Bonds commonly required in construction include performance bonds, payment bonds, and bid bonds. Performance bonds ensure contract completion; payment bonds protect subcontractors and suppliers; and bid bonds guarantee that the winning bidder will enter the contract and provide any required bonds. Posting a bond typically becomes a precondition for contract award, particularly on public projects governed by state statutes and municipal rules in Illinois.

Secured vs. Unsecured Bonds Explained

Sureties evaluate risk before issuing bonds and classify the backing as secured or unsecured. Secured bonds require collateral or indemnity arrangements from the contractor — such as cash, letters of credit, or liens on assets. Unsecured bonds, sometimes called “credit-based” bonds, are issued primarily on the contractor’s credit strength, financial statements, and operating history without collateral deposits. Each structure influences liquidity, cost, and accounting treatment.

Understanding the trade-offs between the two is crucial: secured bonds offer lower risk to the surety but tie up valuable resources for the contractor, while unsecured bonds preserve liquidity but require strong financials and often a long-standing relationship with the surety agent.

Secured Bonds

Secured bonds involve a pledge of assets or a cash collateral account that the surety can access if a claim arises. Common forms include blocked cash accounts, certificates of deposit held as collateral, or irrevocable letters of credit. The surety may also require personal or corporate indemnity agreements that expand the recovery rights beyond the bond amount.

For contractors with thin margins or inconsistent cash flow, secured bonds can be a practical way to obtain bonding capacity. However, the financial cost is tangible: collateral reduces working capital available for payroll, materials, and equipment. Collateralized arrangements may also incur bank fees, opportunity costs, and administrative burdens when reconciling collateral releases after project milestones are met.

Unsecured Bonds

Unsecured bonds rely on the contractor’s demonstrated creditworthiness, historical performance, and the surety’s underwriting confidence. Underwriting criteria typically include audited financial statements, robust backlogs, favorable liquidity ratios, years in business, and a history of completing similar projects. In many cases, a surety will offer unsecured bonds to firms that have a proven track record and ample net worth relative to their bonding exposure.

Unsecured bonds are attractive because they do not require immobilizing cash or granting liens. This preserves working capital and simplifies accounting. The catch is that unsecured capacity is limited and can be revoked or reduced if financial conditions deteriorate. Consequently, maintaining strong financials and transparent relationships with sureties is essential to keep unsecured capacity available.

Key Factors Influencing Which Bond Type You Need

Selecting between secured and unsecured bonds depends on multiple interacting factors. No single criterion determines the outcome; underwriting looks at the whole financial picture and the specifics of the project. Understanding these drivers helps contractors anticipate expectations and prepare the documentation necessary for quicker approvals.

Credit score and financial health.

Credit ratings and financial statements are primary inputs for surety underwriting. Lenders and sureties review working capital, current ratio, net worth, backlog quality, profit margins, and historical cash flow. Low liquidity or inconsistent profitability often leads to secured bonds or higher premiums, because the surety needs additional protections to mitigate risk.

Strong credit and audited financials increase the chance of unsecured bonding. Unsecured capacity is typically calibrated as a multiple of net worth or working capital, so improving these metrics directly increases available unsecured limits.

Project size and type.

Large or complex projects increase the surety’s exposure and may trigger collateral requirements even for financially sound contractors. Projects with unique risks — such as technical complexity, compressed schedules, or performance-based incentives — often prompt stricter underwriting. Public infrastructure projects frequently have higher bond amounts and rigorous compliance standards, which can push smaller contractors toward secured arrangements.

Conversely, smaller or standard-repeatable jobs are viewed as lower risk and are more likely to be bonded unsecured if the contractor has established a strong track record in that market segment.

State and project owner requirements.

State statutes, municipal ordinances, and private owner contract terms can dictate bonding rules. In Illinois, public works projects typically require both performance and payment bonds for contracts exceeding specified thresholds. Bonding requirements may also stipulate acceptable forms of collateral or require surety prequalification, affecting whether secured or unsecured bonds are feasible.

Private owners sometimes require additional endorsements or specific surety ratings. Understanding the owner's contractual expectations during bid preparation avoids surprises at the bid bond or contract execution stage.

Accounting & Financial Impact for Contractors

Bonding decisions affect accounting treatment, reported liquidity, and cost allocation. Properly reflecting bonds in the accounting system ensures accurate financial statements and informed management decisions. Close coordination between operations, treasury, and the accounting function is essential for consistent reporting and cash management.

Maintaining clear records of collateral deposits, letters of credit, and surety fees also simplifies audits and tax reporting. Misclassification or delayed recognition can distort profitability and working capital metrics that underwriters scrutinize.

How secured bonds affect:

When collateral is used for a secured bond, the accounting impact depends on the form. A blocked cash account remains an asset on the balance sheet but is restricted, reducing available cash for operations. A letter of credit may create contingent liabilities with fee recognition over its term. Collateral release triggers should be tracked to ensure that freed funds are returned to operating accounts promptly and not left idly reserved.

Additionally, indemnity agreements may create off-balance-sheet obligations that affect the enterprise risk profile. These should be disclosed in footnotes and internal risk registers, and management needs to quantify potential exposures for accurate financial planning.

Cost allocation:

Bonds and related fees should be allocated to projects in a consistent manner. Direct bond costs that are specific to a project — such as performance bond premiums for a single contract — are typically charged to that project's overhead or general conditions, depending on accounting policy and contract terms. Shared or company-wide bonding costs might be spread across projects using an overhead pool and applied through an established rate.

Proper cost allocation prevents profit erosion on specific contracts and ensures bids reflect the true cost of bonding. It also supports accurate job costing and performance measurement, which are critical for price competitiveness and margin protection.

Tax implications and reporting.

Bond premiums and fees are generally deductible as ordinary and necessary business expenses. Collateral held in cash accounts continues to be part of the taxable asset base, but any interest earned and bank fees associated with letters of credit are treated according to standard tax rules. When indemnity agreements lead to claim payments, the accounting and tax treatment follows the same rules as the underlying loss recognition.

Consultation with a tax advisor is recommended when using complex instruments like letters of credit, subordination agreements, or when significant collateral is required. Tax rules can change, and state-specific treatments might affect the net cost of bonding strategies.

Best Practices to Stay Financially Ready

Preparation reduces the need for last-minute secured collateral and improves the chances of obtaining unsecured bonds. Establishing disciplined financial controls, timely reporting, and open communication with sureties and bankers creates confidence in a contractor’s financial stewardship.

Implementing these best practices helps preserve liquidity, control bonding costs, and maintain or expand unsecured capacity over time.

Maintain accurate and updated financial statements.

Audited or review-prepared financial statements carry more weight with sureties than internally prepared reports. Timely monthly and quarterly financials with reconciliations show operational stability and reduce underwriting friction. Financial statements should present realistic accounts receivable aging, current liabilities, and backlog recognition to avoid surprises.

Documenting capital improvements, equipment schedules, and outstanding contingent liabilities strengthens narratives during surety underwriting and helps to explain temporary dips in liquidity or atypical expenditures.

Use professional construction accounting services to

Outsourcing construction accounting to specialists familiar with job costing, AIA billing, and surety documentation streamlines the bonding process. Professionals can implement processes that improve cash conversion cycles, reduce days sales outstanding, and identify unprofitable work early.

Detailed job-cost tracking ensures bond-related costs, retainage impacts, and change order flows are visible. Preparation of surety-friendly documentation — including aging schedules, contracts, lien waivers, and work-in-progress reports — accelerates approvals and reduces the likelihood of secured collateral being requested.

How Construction Cost Accounting (CCA) Supports Contractors

Construction Cost Accounting (CCA) integrates project accounting with operational planning to provide real-time insights into profitability, cash needs, and bonding implications. A robust CCA system supports accurate job costing, forecasting, and what-if modeling — all key inputs for surety underwriting and internal decision-making.

CCA tools enable scenario planning for bid preparation, showing how a secured bond (with collateral requirements) versus an unsecured bond (with potential fee differences) impacts working capital and net margins. Regular variance analysis highlights projects that may strain bonding capacity, allowing proactive mitigation such as vendor negotiations, schedule adjustments, or contract amendments.

Ultimately, CCA elevates financial discipline and transparency, making it easier to negotiate favorable bonding terms and maintain competitive bidding positions without sacrificing liquidity.

Conclusion

Choosing between secured and unsecured bonds requires balancing liquidity, underwriting profile, and project-specific risk. Secured bonds protect the surety but tie up working capital; unsecured bonds preserve cash but demand strong financials and trust with the surety. Clear accounting practices, accurate financial statements, and robust CCA capabilities improve the odds of obtaining unsecured capacity while ensuring that secured options are managed efficiently when they are necessary.