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Mick Pattinson

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Small Business Shut Out of Government Contracts -- and How That Is Changing

Posted: 02/21/2012 7:50 pm

No one gets more love than small business. Just turn on any news channel big or small, liberal or conservative, and within a few minutes some politico is telling us how much government is doing to help small business.

Everything except actually hire one: Most small contractors have never received -- or even bid on -- a public works job.

Try this at home: Next time you hire a painter or roofer or gardener or plumber, ask them if they ever do any government work.

They will say no. "Too much paperwork."

Translation: They do not have a credit score high enough to get a bond they need for government work.

It works like this: If your city council decides it needs a new roof, they put it out to bid. Your local neighborhood roofer submits the lowest bid.

But to actually do the job, your roofer needs cash and credit worth at least $300,000 in order to get a bond. (If the roofer cannot finish the job, the bonding company will, then go after the roofing company for the money. So if they don't think you will have it, they will not issue a bond.)

"Today, some bonding companies want 50 percent of the value of a contract as collateral before they issue you a bond, if they decided to issue you one at all," said Dominic Dunlap, a Chicago roofer. "This has put an enormous number of small contractors out of business all over the country because they cannot get a bond for government work."

This is what President Obama meant when he said some jobs were not as shovel-ready as he thought they were going to be.

"It doesn't make sense that the same small business people who pay taxes to pay for the jobs cannot bid on the jobs," said Jerome Stocks, mayor of Encinitas, Calif., and chairman of the San Diego Association of Governments. "Also, with fewer bids, that means state, local and federal government agencies are going to pay more for their projects."

Stocks is getting national recognition for his work in urging public agencies to split their jobs into smaller and smaller contracts to enable more small businesses to bid.

On a parallel front, agencies, contractors and at least one bonding company are finding a new way to get more bids from more small contractors. If this were the movie The Graduate, this is the part where the guy would lean over and tell Dustin Hoffman the secret to his future success: "Funds Administration."

The back story to the secret is this: The biggest reason a small contractor gets in trouble to prevent him from finishing a job is cash flow. They use money from one job to pay the vendors from another.

But led by a New York company called Ox Bonding, government agencies and bonding companies are not just managing that risk, they are getting rid of it entirely. Result: For the first time, thousands and thousands of small business owners are actually competing for and winning bids on their first public contract.

According to Dominic the Roofer, "We had tried more than a dozen bonding agencies without success but finally we found Ox Bonding and we were able to get a bond. Without them, we would be out of business. And they were able to issue us a bond because of the way they manage risk with funds administration."

The people at Ox Bonding are not Angels of Mercy: They run an insurance company. They measure the same risk in the same way as other bonding agencies, they just control it differently.

Instead of looking at just credit scores, they look at the company, its owners, its bids, its profits, pretty much everything.

They just want the answer to one question: Can this company finish the job on time and under budget? They use real construction people to actually meet with the contractors to see if they can do the job, not just check boxes on an application.

Once they figured Dominic the Roofer was up for it, Ox issued him a bond.

Here comes the important part: Once Dominic the Roofer received his bond, the work of the bonding company was just beginning: "Instead of writing a check to the contractor, the city writes a check to the bonding company, and they control the distribution of funds. They pay all the bills until the job is over," said Dominic the Roofer.

Boom! There goes the risk. No more robbing Peter to pay Paul.

"I started this company because when I was a teenager, I sat at the kitchen table with my father, a contractor, and listened as a bonding agent said my father could not qualify for a bond for a bigger job," said Robert Berman, CEO of Cininium Financial, owner of Ox Bonding. "That was very hurtful. There are thousand and thousands of great companies in this country that cannot bid on government work. Many are going out of business. We changing that."

And it is happening in more than 200 state, local and government agencies around the country, from Glen Cove, N.Y, to Honolulu from highways in California to solar energy installations in New Jersey.

"The funds administration is an excellent program," said Glen Cove city engineer Susan Lounsbury, P.E. "It took a bit of explaining to the people in the finance department, but once we did, they were fine with it. And getting to hire more local contractors is good."