Electricians and carpenters from CFM Engineering work inside… (Kenneth K. LAM, Baltimore…)
WASHINGTON — — Like any construction firm hoping to break into government contracting, Linwood Scott's company needed to obtain a surety bond — a type of insurance — in order to win its first job.
But getting the bond, which is required for contracts worth more than $100,000, can be a challenge for small businesses such as Scott's Baltimore-based LCSJ Construction. Underwriters prefer to work with companies that have completed similar jobs or are large enough to sustain major losses if a project falters. And that can create a Catch-22 for first-time contractors.
In an effort to support small construction firms that have been hit especially hard by the down economy, lawmakers are taking another look at expanding a little-known federal program that guarantees surety bonds for companies that can't find them in the private market.
The effort, supporters say, will allow small and minority-owned firms to compete for larger government contracts.
"It was really a headache just trying to find a bond in the normal market," said Scott, whose company got a bond backed by the Small Business Administration to perform construction work at Aberdeen Proving Ground. "I knew I couldn't go the regular route."
As part of the economic stimulus package approved in 2008, Congress temporarily raised the size of bonds the SBA could guarantee from $2 million to $5 million. But the higher cap expired in 2010. Now, a bipartisan group of lawmakers that includes Sen. Ben Cardin wants to expand the limit to $5 million permanently.
The SBA guaranteed 8,638 bonds last year with a total value of $3.7 billion, according to agency budget documents. When the higher limit was in place, the agency backed 218 bonds valued between $2 million and $5 million worth a combined $663 million.
While the stimulus package has drawn criticism, the nonpartisan Congressional Research Service last year found "no apparent organized opposition" to raising the SBA limit. The Republican-led House of Representatives endorsed a $6.5 million cap in May.
"It's not controversial," said Cardin, a Maryland Democrat who has been pushing the issue for years. Maryland, which was awarded about $27 billion in federal work in 2010, trails only the District of Columbia and Virginia in per-capita spending on federal contracts.
Advocates say the program helps new contractors get established. After finishing a few jobs with SBA-backed bonds, they say, contractors have a record on which they can then secure guarantees in the private market.
That's precisely how it worked for CFM Engineering. The Millersville firm relied on the SBA guarantees for about three years until it started winning larger contracts.
"The financials that the bonding companies want to see, when you're a young company, are almost impossible," said Kevin Fitzgerald, vice president of CFM.
The firm has performed work for the Smithsonian Institution and the Department of Defense.
The SBA's program, Fitzgerald said, "was instrumental in getting us here."
Backing larger bonds means more risk for the SBA. But the program's default rate has averaged only about 2 percent. In 2010, the agency collected $9.2 million in fees and recoveries from stalled projects and paid out $4.3 million in claims, for a positive cash flow of $4.9 million.
Despite the lack of opposition, the idea has run into congressional gridlock. Broad legislation that contained several provisions aimed at small-business growth, including the increase, failed to win Senate approval this month.
A spokesman for the SBA said the agency would not comment on pending legislative proposals.
Contracting and surety bond advocates say the cap should be raised for several reasons, not just to lift the economy. The limit, they note, has not kept pace with the average size of contracts awarded to small firms. At the Department of Defense, for example, the average size of small construction contracts now exceeds $5.9 million, according to a recent House Armed Services Committee report.
The program is "in desperate need" of congressional intervention, said Mark McCallum, chief executive officer of the National Association of Surety Bond Producers, which supports the increase.
That's especially true now, he says, as firms that once eschewed government work are flocking to it to offset losses in private construction.
"As long as the private construction industry remains in the doldrums," he said, "this program takes on even greater importance."
In addition, the federal government is increasingly bundling contracts to streamline purchasing, noted Colette Nelson, executive vice president of the American Subcontractors Association.
Instead of soliciting bids to paint a single building, for instance, an agency might expand the request to include several buildings under one contract. That makes the process more efficient, but it raises the price of the contract and, in turn, the bond.
And that can price smaller firms — including minority- and women-owned businesses — out of the job.
Cardin said he is open to the larger, $6.5 million increase approved by the House.
Nelson said she doesn't know what the "magic number" is.
"Any increase would be helpful," she said.
SBA's bond program
Small construction contractors use a government guarantee when they can't secure performance bonds in the private market. A look at the program's use:
Year/Bonds approved/Contract value
Source: Small Business Administration