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March 29, 2012

Contractors sidestep the bonding blockade

  • Look for surety companies that use new tools to evaluate contractors, such as underwriting bonds and working capital, and administering project funds.
    Barratt Group


    It still hurts, but three years into the Great Recession, some contractors are thriving despite the lack of private clients, willing bankers and capable bonding companies.

    Roofers, plumbers, electricians and other building trades are finding new ways to get credit, working capital and bonding. New ways to stay in business by turning to public work. New ways to overcome obstacles to getting that first government contract.

    These new ways can be the difference between going out of business and going to the next job site.

    Dominic Dunlap, owner of Illinois-based DCG Roofing Solutions, could be any one of tens of thousands of contractors around the country.

    “After the financial tsunami of 2008, we knew we were going to have to start doing public work if we were going to survive,” Dunlap said.

    “We are a good company with a good record of finishing our jobs on time and under budget,” he said. “But when we started competing for public work, the bonding companies were telling us we needed to put up 50 percent of the value of the job as collateral before they would give us a surety bond. That’s a lot of cash up front to bid on a $2 million job. We were about to go out of business before we found a company that issues bonds to contractors in a new way.”

    More on that in a minute. Right after we remind you why bonding is such a critical business tool for contractors.

    A surety bond might look like insurance, but it is really credit: If a contractor cannot finish a job, the bonding company must. It can then recover the money from the original contractor.

    Kim Paulicelli, owner of New York-based Premier Mechanical Services, an HVAC contractor, said, “If the bonding company thinks you do not have the cash or assets to recover their loss, they will not write the bond. And you will not get a government job. That is what happened to us before we found a way to get a bond.”

    Now you know what President Obama meant when he said some shovel-ready jobs were not as shovel-ready as he thought.

    Most bonding decisions are made on the basis of credit score.

    That does not sit well with Robert Berman of Ox Bonding, a company owned by Cinium Financial Services of Rock Hill, N.Y.

    “I started our company three years ago to change that,” Berman said. “Great contractors all over the country are going out of business because bonding companies do not understand the ability of these great contractors because they rely only on credit scores. Not their ability to finish a job on time and under budget.”

    Ox Bonding can issue surety bonds to people like Paulicelli and Dunlap because it does two things rare in the bonding market: one old, one new.

    “They actually underwrite the bonds and working capital, just like banks used to do,” Paulicelli said. “That is to say they use people from the contracting world to look closely at our company: our books, our bid, our profit, our people, our record of completing jobs. Pretty much everything. And when they became satisfied the job was right for us, they issued us a bond and we got the job. No one would give us a bond except for Ox.”

    The second part of the secret sauce takes almost all the risk out of an otherwise risky situation: funds administration. Not sexy enough? Just wait.

    Berman said, “The biggest reason, by far, that most small contractors fail to complete a job is they use money from one job to finish another. If their pipeline dries up, the last job comes up short.

    “We eliminate that risk by taking control of the check from the city or other government agency,” he said. “We pay the vendors, labor, taxes, you name it. We make sure the money for that job stays on that job.”

    Ox Bonding is doing just that with hundreds and hundreds of cities and public agencies throughout the country.

    In Glen Cove, N.Y., the city engineer said this new way of bonding helped the city hire more local contractors who do better work.

    On the West Coast, politician Jerome Stocks has been a leader in getting more work for smaller contractors.

    “From the public’s point of view, it is great to have more small contractors bidding on jobs,” said Stocks, Mayor of Encinitas, Calif. “For two reasons. One, we get better prices with more bidders. And two, small business owners are the ones paying the taxes that pay for the jobs. So it is only fair they be allowed to compete for them.”

    Carlsbad, Calif.-based Mick Pattinson is a homebuilder and former president of the California Building Industry Association.

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