Bonding as an Empowerment Tool

It’s a fact: Small businesses are the backbone of the American economy. And surety bonding is the lifeblood of any successful contractor, regardless of size.  

Another fact: Construction is risky business. Contractors often face a myriad of challenges during the life cycle of a construction project. 

Recognizing these facts, the United States government has required surety bonds on public works projects since 1894, and increasingly, many prime and general contractors use bonds for prequalification and the payment and performance assurance on private work. There is no doubt that surety bonds protect taxpayer and owner dollars, as well as ensure that subcontractors and suppliers (that properly perform work) are paid.  

Yet, when bonding is mentioned to small, emerging or minority contractors, there can be a great deal of trepidation and a sense of defeat. The simple truth is that the requirements needed to run a strong, thriving business are the same requirements needed to become bondable. 

The Surety & Fidelity Association of America (SFAA) is leading the effort to educate small, emerging and minority contractors Angela Berry Robinson (right), director of diversity contract compliance for Ferrovial Agroman US Construction Companies, Joanne Brooks, and Kai Earle-Marion (left), DBE manager at The Lane Construction Corporation gather at SFAA’s Construction Diversity & Inclusion Summit 2.0 in Washington, D.C. on why bonding matters, and changing the conversation from bonding as a barrier to bonding as an empowerment tool that leads to controlled growth, job creation and legacy wealth. 

Successful contractors understand that construction is risky business and that risk mitigation includes not only achieving excellence in one’s craft, but also handling the back-office issues of accounting, engineering, human resources and law. A surety professional helps contractors determine their strengths and weaknesses. Bonding benefits small contractors by ensuring payment, but also because the bonding process helps businesses understand their viability.  

One benefit of a surety is that it can provide objective analysis of a contractor’s business and financial health. Sureties are likely to say “no” if a particular project is out of a contractor’s area of expertise, if it is not in their interest to pursue the work, or if a contract contains unfavorable terms and conditions. A surety looks beyond just winning work—focusing instead on viability and profitability, and helps the contractor consider what risks a particular project might pose. 

Because surety professionals have the pulse of the marketplace, they can provide invaluable insights. The surety also is keenly aware of what factors lead to contractor distress and failure. The surety looks at the broad picture, not at just one project. It can assess the risk and determine if risk-shifting makes sense for the contractor, given the company’s financials and performance record.

When a conflict arises, the surety’s services are invaluable because it can independently assess the situation in pursuit of the best outcome. The surety wants the contractor to complete its work, and it often only takes the surety being there to assist with cash flow or other support to help the contractor through a short-term crisis. The strength of the surety’s balance sheet stands behind the contractor, ensuring that projects get completed and bills get paid on time.

The surety industry has a longstanding commitment to assisting small, emerging and minority contractors with becoming sustainable contractors. The SFAA developed the Model Contractor Development Program® (MCDP) in 2000 to give disadvantaged contractors the educational and practical tools necessary for them to become successful business owners and bond ready. The MCDP consists of an educational component and bond readiness component, during which participants work one on one with surety professionals to get their finances and bond applications in order.  

In 2010, the SFAA partnered with the U.S. Department of Transportation (DOT) to implement the Bonding Education Program to assist Disadvantaged Business Enterprises (DBEs) in becoming bond ready and meeting requirements to bid on and win
transportation-related construction and services contracts. Through these programs, contractors learn to develop a trust-based relationship with a licensed surety, become bondable, and have the ability to successfully bid on contracts and win profitable work. Since 2010, the SFAA has held more than 100 Bonding Education Programs, and contractors have achieved approximately $700 million in bonding.

The federal government’s commitment to small, emerging and minority contractors is further exemplified in the Small Business Administration’s (SBA) Bond Guarantee Program. Working in conjunction with the surety industry to assist these contractors, the program has historically provided surety bond guarantees between 70 percent to 90 percent to participating sureties on qualified, yet more risky businesses. The law changed recently, and now the bond guarantees are up to 90 percent. In the SBA program, sustainable contractors are developed through the combined effort of private industry and public support.  

Recently, the SFAA held its Construction Diversity & Inclusion Summit 2.0 in partnership with the Airport Minority Advisory Council, and featuring the National Forum for Diversity in Construction. The SFAA and its partners recognize that small and emerging contractors benefit the most from the bonding process when it is tied to procurement opportunities. Working with prime contractors, the SFAA is steadily increasing the pool of qualified DBEs that are capable of bonding and participating in the building of American infrastructure. 

The summit also highlighted private owners that understand the benefits of bonding and are focused on empowering contractors to take advantage of job opportunities. For example, Johns Hopkins University has provided educational opportunities for contractors to learn how to build strong businesses and achieve bondability. 

Because obtaining bonding is a ongoing process, taking advantage of education opportunities will benefit contractors for years to come. Once a contractor understands the fundamentals, it can begin to grow in a measured and sustainable way.

For small, emerging and minority contractors, bonding may seem intimidating at first. However, those that are willing to learn about the process and put in the time and effort will come to recognize that being bondable is an invaluable asset that leads to strong, sustainable businesses. 

Joanne Brooks is vice president and counsel at The Surety & Fidelity Association of America. For more information on the benefits of bonding or the programs offered by SFAA, visit surety.org.