Unsure-ty: N.Y. Abruptly Pulls Bond Proposal for Small Contractors

Dinallo withdraws NYPIUA proposal without explanation; surety writers offer training program

It took about a month for New York Insurance czar Eric R. Dinallo to back off a plan to allow the New York Property Insurance Underwriting Association — the residual market — to write surety bonds for contractors.

Some say it was a bad idea from the get-go and Dinallo saw the light. It’s hard to know why the insurance superintendent killed the proposal because, through a spokesman, Dinallo declined to comment.

But now the surety industry itself is vowing to reach out to small and minority contractors with a new training program that might improve their access to surety bonds.

The saga began in early November when — after grumblings from some minority contractors who said they could not get bid bonds in the regular market — Dinallo’s department said it would hold a public hearing to decide whether the NYPIUA should get into writing surety bonds. Then, a week before the hearing, the hearing was abruptly cancelled.

Ron Klug, spokesman for the New York Insurance Department, said the department had “no comment” on the cancellation.

Had Dinallo proceeded with the idea, it might have opened a new can of worms, given that the NYPIUA has never written a bond in its 39-year history.

But perhaps the reason he withdrew the bond proposal is that it’s a flawed idea, said Lenore Marema, spokeswoman for the Surety and Fidelity Association of America, a national trade group for carriers.

“It would do exactly the opposite of what a bond is supposed to do,” she said. “A surety bond says the carrier vouches for a contractor, that it will perform its obligations and in an on-time manner according to a contract. But a residual market, where by definition everybody gets a policy, is going to be issuing bonds for contractors who are unqualified to do jobs. It’s the antithesis of what a bid bond should do,” she said.

Get on the Train-ing

The biggest obstacle in getting a bid bond is a nonexistent track record, Marema said. Many contractors have only been in business a few years, and often have spotty accounting records, at least from an underwriting perspective. This deters companies from writing surety bonds, where such information is critical.

The industry is cognizant of that challenge, according to Marema, and the SFAA has beefed up its efforts in New York to train contractors with a program on the ins and outs of getting a bond that it has going in other states. The several months-long series of workshops teaches contractors how to handle accounting, bidding, project management and a range of other duties in a way that should make it easier for surety carriers to bond them.

In September, the SFAA signed an agreement with the Empire State Development Corp. — New York’s main economic development agency — to institute the program as a way to help minority and woman-owned businesses improve their access to surety bonds. The pilot program launches this month. Earlier last year, Office of Minority Affairs of Suffolk County, N.Y., signed on with the SFAA to create a similar program which is also scheduled to start this year.

“It’s worked elsewhere, and we think it can work in New York,” Marema said. “There’s no real difference than anywhere else.”

The SFAA is not the only group helping minority and women contractors secure bonds. The New York City Department of Small Business Services also provides free bonding assistance to firms seeking government contracts where bonds are required. It runs a similar program called “Fundamentals of Construction Management” that covers the requirements and process for obtaining bid bonds. The agency also works one-on-one with firms to review their bond applications. Last year alone, 53 sessions were given, said spokeswoman Kara Alaimo.

Dollars at Stake

Still, the need is large and immediate for minority firms, said Len Britton, director of the New York State Association of Minority Contractors.

“This is a very big issue. Most minority contractors are small contractors, and they can’t get contracts because they can’t get bonds,” he said.

Sandra Wilkin, president of the Women Builders Council in New York City, echoed that concern, saying “our members deal with those issues on a daily basis.” The availability of bonds requires quick action, she said.

Some have proposed lowering the standards for bonding as a quick remedy.

“The requirements for bonding — whether you need it for $200,000 or $1 million, are very similar,” she said. “The state should look into whether there’s a need for an agency to require a $200,000 bond. It may be those standards are from decades ago, when that was a lot more money. In New York, the city and state administration want to grow business in the construction industry; they should look at what makes better sense in terms of limits.”

The federal government has taken this route in a roundabout way. Last July, the Small Business Administration doubled the amount it would guarantee bid, payment and performance bonds on contracts to $2 million in value, up from $1 million.

Whatever the solution, the stakes are growing. Last year, construction spending in New York City alone topped $25 billion, according to the New York Building Congress, about $11.9 billion of which was spent by the state, local and federal governments — the spenders which typically require bonds.