Winning those lucrative federal contracts doesn’t mean a lot to Guam small businesses that can’t get mandatory bonding for performance and payment.
A limit on the amount of bonding local companies can pre-qualify for means contracts are likely to go to bigger players from on- and off-island.
And some companies are apparently disqualifying themselves in the bonding market by showing a tax loss on the books.
Lucrative federal contracts with opportunities for large and small businesses have already begun to show an effect on the construction industry with more work on the way.
Gerald S.A. Perez administrator for the Guam Economic Development and Commerce Authority told the Journal that military spending on Guam in fiscal 2005 is estimated to top $360 million. Of that $100 million could go to local companies he said.
Businesses hoping to compete for that money need to be bonded by U.S. Treasury-listed indemnity and assurance providers.
Jasper “Jack” Corbett is business opportunity specialist for the Guam branch office of the U.S. Small Business Administration. He said small businesses competing for upcoming military work would need to be bonded by U.S. Treasury-listed indemnity and assurance providers. “It is imperative local businesses have the ability to meet federal bonding requirements.”
Corbett said companies who are bondable stand out from their competition. “It makes them different just by the fact that they have a credible bond line which shows a certain level of stability in the company’s management and business practices. I can’t emphasize enough how important this issue is.”
All federal projects over $25 000 require bonding from U.S. Treasury-listed surety companies.
These are generally payment and performance bonds. Federal surety bond requirements may be met in three ways: surety bonds issued by an approved corporate surety; surety bonds issued by an individual surety who pledges certain defined types of assets; and in rare cases by the contractor pledging assets directly.
Corbett said companies are only just beginning to understand that bonding is a requirement for companies that do business through a federal contract.
“We are seeing more people from local companies coming into the SBA office who have been in business for 20 years saying they have never needed a bond before and asking why should they have to get one now.” He said many of the companies have been doing business in the private sector where bond requirements may be relaxed or non-existent. “Federal contracting is new to them and they have a new awakening if they want some of the action.”
Cobett said contractors on Guam that have never needed bonding to perform projects will find it difficult to secure future federal contracts if they do not have a past record of paying premiums and performing satisfactory or non-claim contracted work.
“We are going through an evolution that is twofold. First the increasing need for federal contract bonding and second a renewed need to educate local businesses and contractors on the importance of bond requirements. Companies who in the past have pulled nearly all of their liquidity out of their company find that as a result when they seek bonding for federal — and increasingly more local public projects — they do not have the collateral reserves the bonding company wants as a condition for securing the bond.”
David W. Cassidy is president of both Cassidy’s Associated Insurers and Pacific Indemnity Insurance Co. Pacific Indemnity is the only locally owned surety company that is on the U.S. Treasury listing. “If a surety company is not Treasury-listed it is not able to write bonds on federal projects. So all the companies that we represent are Treasury-listed.”
He said it is important for a bonding company to get and stay on the U.S. Treasury listing because the federal government is extremely careful about who gets issued certificates. “The U.S. government wants to be sure that the bonding company is able to pay a claim when it may arise on a federal contract or project.”
Pacific Indemnity is the vehicle for small contractors in need of bonding up to $300 000. For bonding between $300 000 and $3 million Cassidy said his company uses the ACE Group and the CHUBB Group of Insurance Companies. For larger contractors that can demonstrate financial capability with backup resources Fidelity and Deposit of Maryland is asked to provide bonds. “As contractors grow we move them up the bonding capacity ladder to larger companies that we underwrite.
“We see some new contractors coming in but we already have most of the bondable companies on island as our clients. We spent many years building on our ability to provide bonding because we saw six years ago that sooner or later the military would wake up to the strategic importance of Guam. Now it’s happening. Now we have the ability to handle any bonding requirement for a small medium or large contractor. Now that foresight is paying off.”
Brion B. Kanda vice president of Takagi & Associates Inc. said Takagi is the broker for Fidelity and Deposit of Maryland which is the only U.S. Treasury qualified insurance company that Takagi represents. In the last two to three years he said several bonding companies have left Guam creating a void in the market.
“Because bonding companies have left you are removing from the competition a lot of local contractors that are simply not able to get Treasury-listed bonding. By default the only eligible contractors that can quote on projects coming on Guam are the larger contractors that already have a bonding arrangement established.”
Kanda said the taxpayer may not get the best bang for the buck in situations like this. “Large companies by the nature of the beast tend to have higher overheads. By small business competition being eliminated costs will be higher.”
Fidelity has an infinite bonding capacity he said. “It is the only company doing bonding for contractors with a net worth of $1 million or more.” Kanda said this leaves small business struggling to find treasury-listed bonding so they can perform federal work.
The function of the bonding company is to guarantee to the federal government — or issuer of the proposal — that the contractor will finish the contracted work and on time and pay any contracting bills associated with the project.
All 50 states and territories require performance and payment bonds for state government construction contracts. In Guam government projects require a performance bond of 10%.
Guam companies bidding on government and other projects on-island may not have a proven bonding record while many off-island companies do.
“Guam has become less competitive because we don’t have the same standard of bonding that most other jurisdictions have. These companies that are coming here to compete for the contracts locally to a certain degree have a leg up because they already have a well-established record and come here with high level of treasury-listed bonding ability ” Corbett said.
Cecelia A. Anas is the surety division manager for Moylan’s Insurance Underwriters Inc. an agent for Dongbu Insurance. Dongbu is not U.S. Treasury listed. “The surety company we are representing now is not Treasury-listed so we don’t write for federal projects but we are rated AM best and provide bonding for GovGuam and private performance and payment bonds.”
Margaret “Peggy” Williams is the small business and labor adviser for the U.S. Navy and works closely with Capt. David M. Boone officer in charge of construction. She said if Guam is going to nurture its contractors then something has to be done to help them. “Otherwise the door is left open for the big boys from off-island to come over and secure contracts and the money goes off-island rather than staying and circulating here.”
Companies don’t have the experience or track record to secure bonding at the required levels Williams said. “A lot of contracting opportunities are over the $300 000 level and because companies have not been required to get bonds on other local work they are left out. That is a loss to the whole community.”
Nanette T. Lajato is corporate secretary and treasurer for EEA Corp. a general contracting company that does business as Master Painters. The locally owned company is U.S. Small Business Administration 8(a) or minority owned certified. She said EEA Corp. would like to contract with the Navy on a stand-alone basis but because it is having difficulty fulfilling bonding requirements the company has been pushed out of contracting opportunities by off-island firms.
“The projects with the Navy or Air Force are still slow in coming because of the war in Iraq. The biggest problem is that the contracts are just out of our reach. We can only bond to $2.5 million and contracts seem to be in the $4 million to $5 million range. We can’t compete with big companies like Black Construction.”
Lajato said that because there is such a limited number of Treasury-listed bonding companies doing business it is difficult to qualify under the terms of the few remaining bonding companies that are doing business here. “The people at Cassidy’s are helping us to re-establish our bonding capacity since Gulf Insurance Co. left this summer. We are still in the process of establishing with another company so that our capacity of $2.5 to $3 million is returned. Right now we have been dropped to $300 000 and that is too small. Federal projects are higher so if a $500 000 job comes out we can’t bid. We are hoping for good news next month. It is a matter of survival for us to get the treasury listing and the bonding capacity so we can be competitive.”
Corbett said the only driver in the bonding market here is the federal requirements. He said systemic changes needed to be made to bonding requirements on Guam.
“If we don’t find ways to get more bonds into the local marketplace and make it more of a standard of doing business then the insurance companies that write these bonds are going to continue to pull out of the marketplace.”
Williams said the contracting community needs to understand why lucrative contracts are going to off-island companies. “It’s not that the companies are any better. In fact they mostly end up subcontracting the work once they are here. It’s that local businesses have not been required to have bonding requirements placed on them in the private sector like the federal government does.”
Corbett said companies have been contributing to their own inability to get bonded.
“The biggest issue has been with the smaller firms in particular pulling all the money earned out of the company because then they can’t demonstrate profitability or demonstrate anything they can risk to justify the bond. The reason they pull that money out and show a loss is because a lot of these are first-generation immigrants that believe they should not have to pay a dime in taxes ” he said. “Why else would you be unprofitable each year? So you don’t have to pay taxes.”
That approach works against the companies in a number of ways. Corbett said “It works against them when they go to the bank for loans and it works against them when needing a bond.” Corbett said companies need to “show profitability performance on the work and have some type of asset they would be willing to pledge as collateral to put up to secure the work.”
Cassidy said he anticipated plenty of work coming to Guam that will require U.S. Treasury listed bonding. “We are here to help companies that can demonstrate they are also willing to take risk. It is gratifying to see companies grow up and we can help. It’s important to remember how much money that is made by local businesses is money that circulates to greater extent than that which will go off-island.” MBJ