Dominic Dunlap, owner of DCG Roofing Solutions, Inc., in Chicago, says before he can even think about bidding for lucrative government contract work, he has to jump through a lot of hoops.
In fact, he said, convincing the government to select his firm may be least of his worries.
First, he needs to go through the complicated and costly process of securing a financial backstop – or a bond, which protects taxpayers, subcontractors and other potential counterparties in case DCG fails to meet its commitments.
Landing a bond as a fairly new business owner, like Dunlap, who has 16 employees and has been in business since 2006, is a challenge, to say the least. Before the financial collapse, Dunlap said bonds required between 5% and 10% collateral, but post-recession insurance companies won’t take the chance and today demand between 30% and 50% collateral, which most small companies just don’t have. Because of the tougher requirements, Dunlap said his roofing company has a lot less competition.
Bonding itself is a good thing, according to Robert Berman, CEO at Cinium Financial, because it protects taxpayers from footing the bill if the government loses money on the contract. The bond also guarantees the project will be completed on time, on budget and that union dues and suppliers will get paid. Suppliers and subcontractors can also have lien rights if titles are involved, Berman said.
While state and federal governments have different bid amounts on work that require a bond, Berman said small contractors more often than not are unable to acquire municipal work without a surety bond.
“Money never makes its way up Main Street,” he said. “The construction business, in a way, is almost prejudicial. You are only as good as your last job, and there is no guaranteed business. There’s no steady stream of income because the question is always, ‘Where is your next job coming from?’”
Berman said he is trying to rework this system by taking a gamble on small construction firms. Through Cinium’s Ox Bonding, Berman and company are looking at more than just credit scores when assessing a small company for a bond.
“Due to the financial tsunami of 2008 and 2009, something that may have been no fault of [the business owner’s] like a medical problem or going underwater on their mortgage or an investment in real estate that didn’t turn out well, destroys their credit score. We look at credit scores, but it’s not a hard stop.”
Ox digs into what actually happened, Berman said, and is bonding small contractors who don’t have the resources to obtain a surety bond through traditional means. However, there’s a catch. Ox Bonding charges a premium for the bond of around 2% on average, and also charges a funds administration fee of between 1% and 3%.
“They have access to what really becomes an unlimited line of credit that they could never get from a bank,” Berman said.
Ox Bonding began its contract credit program in May 2011, and has since funded more than 500 clients, Berman said. It has expanded into all 50 states through its relationships with other insurance carriers and has extended more than $100 million in credit, more than twice that amount in surety and working capital. Berman said since the company began writing surety in 2007, it hasn’t sustained any losses.
“We underwrite character and are willing to understand the client,” Berman said. “Most sureties will look at the financial statement of a tax return, which is a snapshot in time. It’s not accurate.”
Dunlap has received about 20 surety bonds from Ox within the past year, ranging from $400,000 to $1.2 million. He has worked on about 100 local and federal contracts since starting up in 2006, and said he completes about $2.5 million to $3 million worth of work annually.
Dan Acevedo, owner of MBA Construction Company in Blackfoot, Idaho, went the Small Business Administration route in securing bonds for his company. He said the company’s initial years were helped along by the SBA’s Surety Bond Guarantee Program.
“If you are a relatively young company, you don’t have the history of capital assets to justify a private equity company, or bonding company, to bond you,” Acevedo said. “The SBA process was extremely helpful.”