Bonding capacity critical for small businesses

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ContractsThe adage of ?you have my word,? may soon be replaced with something akin to ?you have my bond?, especially when it comes to small minority and women business enterprises (M/WBE?s) hoping to land multi million dollar state and federal contracts.

A bond is basically an insurance policy for which a contractor pays a premium. The bond essentially guarantees that the service provider will meet his obligations to complete the contracted project in a timely and satisfactory manner. In order to bid on lucrative government contracts, being bonded is a necessity?especially for construction-related projects. Contractors are required to purchase bonds in order to work on public projects.

Unfortunately, many M/WBE?s never even get to that point due to limited or no bonding capacity.?

When Michael Barnes started his company?RPM General Contractors in Philadelphia, Pa., in February 2002, his bonding capacity was about $100,000?which is considered low by some industry standards. However, between 2004-2005, the bonding capacity for the company increased from $100,000 to $400,000?making RPM eligible to bid on larger projects.
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?A lot of contractors won?t even consider a bid from a construction firm with a bonding capacity of anything less than half of a million dollars,? Barnes said. ?It?s tough for a lot of small minority construction firms to get to that level in a short period.?

Others agree.

William Parrish, president and CEO of Noble Strategy?a construction management firm based in Newark, New Jersey said some bonding companies are reluctant to extend sizable bonds to M/WBE?s with a limited track record.

Parrish noted there are some small business mentoring and training programs that offer bonding assistance that allows M/WBE?s to bid on certain projects. For example, at the School Construction Authority (SCA) Mentoring program in Long Island City, New York, graduate firms can be issued a surety bond. The three-party instrument is a contract between the bonding company, the contractor, and the owner of the project. The agreement binds the contractor to comply with specified terms and conditions of the contracts.

Finally, Parrish of Noble Strategy contends that having a proven track record, secure assets, solid collateral, and a cogent business plan are also key elements in securing a bond. ?Some bonding companies will take a chance on a small business that shows promise and potential,? he said ?The bonding company wants to know that your business will complete and deliver an acceptable finished project.?