Home » MBJ FEATURE » SBA looking to boost small contractors' bonding limit

SBA looking to boost small contractors' bonding limit

The U.S. Small Business Administration (SBA) has amended its regulations under its Surety Bond Guarantee program in an effort to give small contractors more bonding capacity in the wake of a disaster.

However, three of Mississippi’s largest construction trade associations say this has never been a problem for its members. And some wonder if increasing bonding limits for contractors at this time — disaster or not — is a good idea. They are concerned that contractors are currently eating up their bond capacity on jobs that offer little or no profit as they look to survive the floundering economy.

Late last month, the SBA made public changes to its Surety Bond Guarantee program related to the Small Business Disaster Response and Loan Improvements Act of 2008. Published in the April 2010 Federal Register as a proposed rule, the changes are now final.

The changes increase the eligible amount for recovery work in disaster areas.

In a statement, SBA administrator Karen Mills said. “These changes to the Surety Bond Program will have a two-fold impact: Helping small businesses compete for and win contracting opportunities gives them the chance to grow and create jobs, while at the same time jump-starting economic activity and rebuilding efforts following a disaster when communities and regions need it most.”

SBA’s David Byrne, whose areas of responsibility include the Office of Surety Bond Guarantees, told the Mississippi Business Journal, that Hurricane Katrina was a factor in the rule changes, adding that “all disasters are a factor.” He said the agency wants to ensure small contractors have a chance at larger projects in the wake of a disaster that would typically be outside their capacity due to bonding issues.

The changes include:

>> For a non-federal contract or order up to $5 million, a bond guarantee may be issued if the products will be manufactured or the services performed in the disaster area.

>> For a federal contract or order up to $5 million, the performance site can be outside the disaster area if the contract or order will directly assist the disaster recovery efforts.

>> For a federal contract or order, the amount of the guarantee can be as much as $10 million at the request of the head of an agency that is involved in reconstruction efforts.

The increased amounts would apply during the 12 months following the disaster declaration, unless SBA provides for an extension related to a particular disaster.

While Mississippi Road Builders Association executive director Mike Pepper says he is encouraged by the new rules, he has not heard of the lack of bonding capacity to do disaster work a problem among his members.

Pepper came on board at the MRBA after Hurricane Katrina, and could not speak to his members’ needs in the aftermath of the storm.

However, Perry Nations, executive director of the Mississippi chapter of Associated General Contractors, and Buddy Edens, president and CEO of Mississippi Associated Builders and Contractors, were at their posts during the 2005 storm, and both echoed Pepper — their members did not have bonding issues in the storm’s aftermath.

In fact, the three men say their current concern is on the other end of the spectrum.

The downturn in the economy is challenging Mississippi’s construction community. Many contractors are bidding jobs well under estimates just to keep workers on the payroll and the doors open. Projects that once drew a handful of bidders are now attracting scores of desperate contractors.

“We’re seeing $250,000 and $500,000 projects that used to draw five or six bidders sometimes drawing 15, 18 bidders,” Nations says. “It’s super competitive and margins are thin. Most are going to lose money, some will break even and a very few will see perhaps a tiny profit.”

Nations adds that this is a short-term grab that could have long-term consequences for many builders.

“When the economy does turn around, I’m afraid many contractors won’t have the bonding capacity to take advantage of it because they have taken these projects,” he says.

Pepper says all one has to do is look at the Mississippi Department of Transportation’s lettings to see just how far under estimates some contractors are bidding.

“It is just not sustainable,” Pepper says.

Edens says he has seen bids for projects come in as much as 40 percent under architect’s/owner’s estimated costs. He, too, worries that many contractors are creating long-term problems for themselves.

“We’re starting to see a little improvement now,” Edens says, noting an up-tick in private investment. Will contractors be able to take advantage of the turnaround, he wonders.

Even veteran contractors are struggling in the current environment. Nations said often that the 1990s were the “golden age” for contractors. Work – and profits — were easy to find.

Now, Nations, a 35-year construction veteran, says the environment is the worst since the Great Depression, and contractors are finding the adjustment more than a little difficult

“I wasn’t around then, but I’m not aware of any time worse than it is now for construction since the Depression,” he says.

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