New program to guide contractors in obtaining bonds

Bill Hertel gets the calls all the time from contractors striking out on their own and in need of a performance bond to secure a new project.
Many of the calls come from minority business owners, says Hertel, manager at East Greenwich-based Masters & Servant Ltd., a business insurance broker that handles the type of bonds that essentially provide financial protection against a contractor failing to complete a project.
But the calls typically don’t go very far.
Once Hertel tells them what an insurance company would expect from the contractor before underwriting a bond – such as detailed financial statements, for instance – he often doesn’t hear from them again.
“I can’t tell you how many entry-level contractors just don’t have the information they need,” Hertel says.
The problem, minority business advocates and other business leaders say, is that the inability of many new and emerging companies to navigate the bonding process is blocking them from more lucrative contracts and either stunting their growth or knocking them out of business all together.
Those unable to get bonding, for example, can’t bid for public construction projects because most require a bond guaranteeing the work will be completed.
That’s why the Surety and Fidelity Association of America (SFAA) is preparing to launch a program in Rhode Island to guide contractors who are inexperienced in business matters through the process of obtaining a bond. The program will offer workshops, and volunteers familiar with the surety industry will work one-on-one with contractors.
“A lot of these small and emerging contractors are having difficulty entering the bond arena because they don’t know who to talk to or what information they need,” says Sam Carradine, director of development and diversity at the Washington, D.C.-based SFAA, which represents numerous surety companies nationwide. “The majority of those emerging contractors are minorities. … Part of this effort is to get those companies in a better position to be bonded.”
The Model Contractor Development Program is already in place in several other states. In New York, the program has been running for more than a year at five sites and has led to participating minority- and women-owned businesses obtaining more than $31 million in performance bonding, according to the SFAA.
Rhode Island’s version for the Model Contractors Development Program is expected to get under way in September. SFAA staff members already are working with the Rhode Island office of the U.S. Small Business Administration and the Rhode Island Small Business Development Center.
SBA spokesman Normand T. Deragon says the issue of bonding has little to do with a contractor’s skill in the trades, but how they do running a company. “A lot of people are not too good on the business end,” he says.
Aside from helping to launch the Model Contractors Development Program, the SBA already has been providing assistance.
For small and minority-owned businesses that cannot obtain surety bonds through regular channels, the agency offers the SBA Surety Bond Guarantee Program, in which it backs up to 90 percent of the bond for contracts under $100,000 and 80 percent for contracts more than $100,000. The program is limited to contracts under $2 million.
The idea to launch the program in Rhode Island developed after state Rep. Anastasia P. Williams, D-Providence, submitted a bill last year that would have raised the threshold on which government construction projects would require a performance bond.
State law says any contract larger than $50,000 needs a bond, and Williams wanted to increase it so that smaller companies would be able to bid without being bonded.
Representatives with the SFAA met with Williams and sold her on the Model Contractor Development Program. House Majority Leader Gordon D. Fox,
D-Providence, signed on, too.
There are no readily available statistics on surety bonding and what percentage of businesses fail to obtain it. But Hertel, with Masters & Servant, said he is surprised by how little some business owners know about getting bonding.
More contractors appear to be seeking bonding as of late because of a lack of private work – where performance bonds are not required – in areas such as homebuilding. As a result, some builders figure they’ll bid for public jobs. There is a cost, however. Fees for a surety bond can range from $10 to $25 per $1,000 of the contract, depending on which company is seeking the surety bond.
Some have contacted Hertel thinking it’s like buying car or homeowners insurance: If you pay the premium, you get it. But that’s not the case.
Carradine agrees. “A surety bond is more of a credit product than an insurance product,” he explains.
Surety companies want to see a business’ financial statements compiled by a CPA, and they want to run the numbers to check things such as debt-to-equity ratios.
The problem is many of the people seeking bonding are carpenters, electricians and plumbers who until now have operated without keeping a close eye on the books.
“But the minute you introduce a third party, there has to be formality there,” Hertel says.
Here’s how the SFAA program will work:
There will be 10 workshops on various topics, such as planning and management of a construction company, banking and financing for contractors, marketing estimating and bidding, project management, claims and dispute resolution, and bonding and insurance for emerging contractors.
Then contractors will have the opportunity to talk with volunteer surety bond producers, underwriters and others to talk about what they need to complete a bond application.
In some cases, volunteers will help contractors assemble a more thorough package and will review the aspects that would ordinarily lead to a rejection.
With the economy still sagging, many contractors need all the assistance they can get right now.
Both Carradine and Hertel insist the bonding companies have not tightened their underwriting standards in response to the recession. But that’s not to say obtaining a bond hasn’t gotten more difficult.
“The standards haven’t changed, but what has changed is the ability of companies to meet those standards,” Carradine says. •