The $1.35M Visitor Center: Working Capital, the License Dollar Limit, and Bonding Capacity
Alma is the qualifying party and 100% owner of a GB-98 general building company in Española. Annual revenue is $2.4M. Her balance sheet shows cash of $180,000; accounts receivable of $410,000, including $150,000 of retainage held on two completed jobs; materials inventory of $40,000; accounts payable of $290,000; a line of credit drawn to $60,000 against a $155,000 limit; current portion of equipment debt of $70,000; and accrued payroll of $45,000. CID records show her license carries a maximum project amount of $1,000,000.
The Bureau of Indian Affairs invites a bid on a $1,350,000 visitor center: 5% bid bond, 100% performance and payment bonds, 10% retainage on every pay application, payment 45 days after billing, nine-month duration, and a combined gross receipts tax rate of 7.3125% that must appear as a separate bid line. Her surety's single-project limit is $1,500,000 and the bonding agent says capacity is "fine." Peak monthly cost at full production is about $220,000.
1. Compute working capital and the peak cash demand of this contract. Can the company carry the job on its present balance sheet and credit line?
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Working capital: current assets ($180,000 + $410,000 + $40,000 = $630,000) minus current liabilities ($290,000 + $60,000 + $70,000 + $45,000 = $465,000) = $165,000. Undrawn credit is $155,000 − $60,000 = $95,000, so total liquidity is roughly $260,000.
Peak demand has three components, not one:
- Carry. Billing at month end with payment at day 45 means about 75 days of cost is unrecovered at any time. At $220,000 per month that is $220,000–$275,000 in the ground before the first check clears.
- Retainage. 10% is withheld from every payment, so $135,000 is locked up at completion and released later still.
- GRT float. 7.3125% × $1,350,000 = $98,719 is collected with the contract but remitted on the state's schedule; if remittance runs ahead of collection she funds it.
By roughly 60% completion, unrecovered cost plus retainage brushes $300,000 against $260,000 of liquidity that is also covering retainage on two other jobs. The job is financeable only if the payment terms change - 30-day payment, retainage reduced or released at 50%, or a mobilization payment. As written, one slow owner payment puts payroll at risk.
2. What does the $1,000,000 license limit and the $1,500,000 single-project bond limit mean for this bid, and why is the bonding agent's "fine" misleading?
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License limit is a hard stop. The dollar limit on a New Mexico contractor license is set from the financial information filed with CID. A $1,000,000 maximum project amount means she cannot lawfully bid or contract a $1,350,000 project. Raising the limit requires submitting a current financial statement to CID and having the limit reissued - weeks of work that must be finished before bid opening, not after award. Bidding over the limit exposes her to CID discipline and leaves the contract unenforceable by the contractor.
Bond capacity is technically enough, practically thin. A $1,500,000 single-project limit clears $1,350,000, but it consumes 90% of the surety's tolerance and leaves nothing for a change order or a second award. More important, sureties underwrite against working capital and aggregate backlog, not just the single job. At a common 10:1 to 15:1 ratio, $165,000 of working capital supports roughly $1.65M–$2.5M of total bonded work - a capacity she has already partly consumed.
The agent is answering a different question ("can I write the bond?") than the one that matters ("can the company survive the cash cycle?"). Bid bond exposure is 5% × $1,350,000 = $67,500 if she wins and cannot perform.
3. Recommend whether to bid, and identify the conditions that would have to be true before submitting a number.
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Recommendation: no-bid as structured; bid only if the conditions below are locked down before Thursday.
- Fix the license. File the updated financial statement and get the maximum project amount raised above $1,350,000. Without this, everything else is moot.
- Change the cash terms. Ask for 30-day payment, retainage at 5% or release at 50% completion, and a mobilization payment of 8–10%. Any one of these removes most of the projected shortfall.
- Confirm the line. Either get the LOC increased or arrange a subordinated advance from the owner; do not plan to fund the job from the two retainage balances that are already 90+ days old.
- Price the money. At an 8% net margin the job yields about $108,000. Carrying $300,000 at roughly 9% for six months costs about $13,500, bond premiums at 1.5–3% cost $20,000–$40,000, and GRT float adds more. If the margin cannot absorb $60,000 of financing and bonding cost, the job is a revenue trap.
- Consider teaming. A joint venture or subcontract with a larger licensed firm spreads both the license limit and the cash exposure.
The judgment the exam is testing is that "we can win it" and "we can bond it" are not the same as "we can finance it."