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Contractor Roadmap for Growth and Stability

By Robert S. Goldstein, CEO
Unique Surety and Insurance Services, LLC

As the construction sector continues its gradual recovery, many large and middle market contractors have been able to seize opportunities to participate in new private sector projects by expanding their project mix.

Even as the number of private sector projects remains on an upswing, some contractors are looking for ways to maintain their growth and insulate themselves from future economic downturns.

By diversifying their project mix to include more public sector work, contractors may be able to accomplish that objective. For the most part, municipal, state and federal construction projects represent potentially lucrative opportunities for contractors that often provide protection from cyclical swings in the economy.

According to the U.S. Census Department, the public sector currently accounts for $279 billion of the $971 billion total annual spending on construction in the U.S. A key challenge for contractors seeking government work, as well as some types of private sector projects, is that they typically require the procurement of a surety bond that guarantees the performance of the contracted work according to the schedule and specifications stipulated in the contract.

If there’s a deviation or delay, default or bankruptcy, the surety or insurance company in most cases will mitigate the loss by either offering additional working capital or through other solutions, such as securing a replacement contractor to finish the job. The surety may also pay the penalty sum stated in the bond to the obligee.

The bonding requirement typically applies to the general, lead, and prime contractors, as well as the subs and large independent trades. For all these types of firms the prerequisite to success is to obtain the required bonding authority – both for their own services and for those provided by their subs.

Contractors should note that a surety bond is not insurance. Insurance is used to spread risk and pay the insurance buyer for any covered loss. In surety bonds, however, every bond has a personal and/or corporate indemnification clause that requires the corporation or individual obtaining the bond to guarantee to the surety company full repayment of all losses.

One of the biggest obstacles preventing an individual or company from obtaining a bond is the lack of adequate reserves to address any potential shortfalls in reserve working capital required to handle such issues as delayed payments, disputes over service quality or other factors. The lack of so called “rainy day” funds is the most frequent reason for contractors to be denied a bond.

Even for firms that otherwise may appear to have sufficient working capital, sureties still will insist on them maintaining adequate reserve levels. Essentially, the surety will want to be sure that if a contractor doesn’t get paid this week because there’s a dispute over a bill, performance, or quality of work, they will still be able to pay their suppliers, meet payroll, and continue to operate.

For many contractors, this roadblock can be extremely frustrating. For instance, a contractor may have 10 or even 20 years of experience or more, as well as several concurrent jobs, low debt, good credit, and be a solid corporate citizen with a great reputation; yet, still may be unable to obtain a bond because of inadequate reserves.

What many contractors don’t know, however, is that there are some alternative funding mechanisms that they may be able to access to establish the reserves necessary to qualify for bonds. While most firms can’t simply go to a bank and borrow money to build reserves, there are other options. These include the following approaches for doing it on their own or getting outside help:

• Seek help from the Small Business Administration (SBA). Contractors may seek to access the SBA’s Surety Bond Guarantee program (SBG) or encourage any subs having difficulty with bonding to do so. Little known rules permit a contractor with a newly incorporated business – but whose ownership has prior related work experience – to participate. If approved, the U.S. government will guarantee a large portion of your bond issued by a select carrier regardless of your reserve capital. There’s a process for applying for the SBG program, which involves a select group of commercial surety carriers that are participants. Unlike a general insurance agent, an experienced bonding agent specialist with the special designation of “an SBA admitted agent” (a list can be found on SBA.gov) can walk a small, medium or large contractor through the process and simplify an otherwise arduous task to obtain the best possible outcome in the shortest possible time.

• Obtain financing from specialized hedge funds. There are a growing number of specialized hedge funds who are willing to put up equity capital that will provide contractors with the financial resources they need to qualify for bonding. These firms are typically aligned with leading national bonding agents that represent several surety bond carriers offering bid, performance, payment and maintenance bonds for the construction industry.

• Establish joint ventures. Some contractors have been able to strengthen their financial statements and establish adequate reserves by forming joint ventures with complementary businesses or even rival contractors. Their combined statements and cash reserves may enable them to qualify for bonding and they can share expenses and split the profits from a project for which they would not have qualified if pursued separately.

• Tap into home equity. For decades, many business owners have tapped into the value of their residences to establish home equity lines of credit and invest the capital in their companies. In this case, depending on the availability of such funds, a contractor may be able to use these credit resources to access cash and deposit it as paid in capital in for their business.

• Borrow from family or friends. Some smaller contractors are able to access needed capital by borrowing from family members and repaying them after completing a job.

As more contractors and construction trade firms look for ways to insulate themselves from the volatility of economic cycles, an effective strategy may involve diversifying their project mix to include government work. Such projects typically require bonding, which has unique financial requirements that may be difficult for some contractors to satisfy. By exploring alternatives they may be able to qualify for bonding, and achieve their goals of project diversification and sustainable growth.

Bob Goldstein is chairman and CEO of Unique Surety and Insurance Services, LLC, a leading national surety agency representing several of the top carriers listed by the U.S. Treasury. Unique Surety and Insurance Services, a Florida East Coast Chapter-AGC member, focuses on offering a wide range of surety and fidelity bonds directly to the construction industry, manufacturing, transportation, energy, technology, environmental, judicial, and equipment leasing. The firm is also an SBA admitted surety agent. Bob Goldstein may be reached at 561.536.5997 or bobgoldstein@bondwithunique.com.