This is a nasty subject. Not because collateral for surety bonds is inherently bad, however because it is a topic of nice angst for contractors and their insurance / bond agents. For example:

Why is the bonding firm taking cash from me once they can see I am in a weak cash position? I want it to efficiently perform the new project.
You don't pay me interest on the cash? Why not?
When the job is half carried out, you will not release a part of the collateral?
You will not launch the collateral upon acceptance / completion of the contract?
You'll not release the collateral till the warranty interval ends?
Etc. Plenty of aggravating phone calls and emails.
With all this aggravation ahead, why do some bonding companies require collateral? The reason is to protect themselves within the event of a bond claim.
When a contract surety loss happens, the claims division hopes to have relyable resources for monetary recovery:

The unpaid balance of the contract goes to the surety as they complete the work
The surety sues the applicant / firm and its owners to recover the loss
Collateral necessities come up when the surety desires to have certainty. If a problem develops, they do not need to find that the shopper has no cash left, or they declared bankruptcy... or left the country. If they're to write the bond, they need a guaranteed way of having monetary recovery.
Bearing in mind that collateral is an expensive value to pay for a bond, let's look at another approach that helps the surety, however doesn't take a big bite out of the contractor!

"Retainage" is money the project owner hold back (retains) to assure the ultimate completion of the project and payment of associated bills. If the retainage is 10%, the contractor receives ninety% of the funds they're owed because the job progresses. On the finish, the contract owner / obligee will nonetheless be holding 10% to keep the contractor focused on reaching total, satisfactory completion. In this method, the retainage cash protects both the obligee and the surety - making a bond claim less likely.

"Surety Consent to Release of Final Payment" is a voluntary procedure obligees might use as a courtesy to the surety. The final bit of contract funds could also be helpful leverage to get the contractor moving for the final contract adjustments. There could also be building cracks, broken glass, faulty lights, painting errors - small stuff that the obligee cares about but the contractor might find annoying to correct. The Surety Consent is another way for the bonding company the keep away from a claim. "Fix this problem or we will not comply with release your final payment."

How can these two useful tools be incorporated to guarantee they are going to help the surety, and subsequently replace the need for collateral?

The answer is to add a condition to the bond (necessary compliance required by the obligee) stating that there could also be no release or reduction of retainage or remaining payment without the prior written consent of the surety. Now the bonding company is assured to have a monetary resource available and the amount is known in advance - just like collateral. But the contractor didn't have to drain the corporate bank account to perform it: Win-win!

What if the contract terms do not provide for a retainage procedure? One will be added by contract amendment. If Funds Control (an escrow agent) is in use to handle the contract disbursements, a retainage procedure may be added to the funds control agreement.

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