Contractors Lose Bonds; Lose Businesses

A city council member in California and a business owner in New York, offer a frank and biting analysis of the current picture.

Salem-News.com

(PERRIS / NEW YORK) - Despite unlimited money and talk, most government stimulus aimed at small business is wasted, because most small businesses cannot do government work.

That is because they cannot get bonded. They cannot get working capital.

So they lose jobs. They even lose their businesses. But few notice because they are so busy talking about how much they love small businesses.

But it doesn’t have to be that way.

For most non-business owners, bonding is a MEGO issue: My Eyes Glaze Over. But for small contractors trying to win their first government bid, bonding and working capital are matters of life and death.

Governments require a bond for contractors to make sure they finish their jobs and pay their vendors. If not, the company that issued the bond does. Then the bonding company can turn around and pursue the original contractor for whatever it cost to finish the job.

Pursuing the original contractor for damages makes bonding more like credit than insurance. Which makes it more difficult to get.

If a contractor wins a $200,000 bid to paint a school, most bonding companies will look at the contractor’s credit score before deciding to issue a bond. To get a $200,000 bond requires the same kind of balance sheet and cash reserves as a $200,000 line of credit.

Most small business owners cannot qualify for that kind of financial instrument from most insurance companies. For bigger jobs, the problem, of course, is worse. And once the bids start climbing to the million dollar mark, more and more small contractors have to drop out.

And even if win a bid for a larger job, it is often impossible to do because they lack the capital to pay their bills while they job is underway. Even with a signed contract, most banks will not lend a small contractor working capital.

So local jobs for small local contractors often go to larger, out of town firms. Just the opposite of what was intended.

In Southern California, Jerome Stocks, Chairman of the San Diego Association of Governments, is leading the way in making it easier for small contractors to get government work.

And why not? They are the ones who paid for it.

Stocks is working with state and local governments to divide their jobs into smaller and smaller units so that more and more smaller local contractors can at least get a shot at bidding on them. A lot more contractors can bid on a $300,000 job than a $3 million one.

This is the opposite of some states where they recently tightened bonding requirements; removing thousands of small businesses from being able to compete for public work.

No one is suggesting that public work should be a welfare program. But the fewer small contractors that bid, the more the project will cost. We saw that recently in St. Louis, where a small contractor almost had to decline a public works job because she could not get a bond or working capital.

Had she not found one at the last minute, the next smallest bid would have cost the taxpayers another $100,000.

All over the country, local and state and federal governments are paying too much for public works jobs because smaller contractors cannot qualify to bid on the work. Less competition means higher prices.

Some insurance companies are looking past credit scores and judging contractors on past performance and their ability to handle new jobs. That is called character.

This is the best and sometimes only hope to rebuild a business. Or an economy.

So for all those constantly professing love for small business owners, thanks. But if you really want to help, keep the love. Pass the bonding and working capital.

Mark Yarbrough is a city councilmember in Perris, California and a business owner. Robert Berman, is the co-founder of Ox Bonding, and started the company three years ago because he remembers seeing how his father was denied a bond for a bigger job because he did not have the balance sheet for it.

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