Perserverance

Contractor's word may be good, but law says a bond is better

BY STEVE GIEGERICH • sgiegerich@post-dispatch.com

Rhonda Taylor's introduction to the small business arena was proceeding right on schedule.

The janitorial service she'd started in 2008 had expanded into landscaping and outdoor maintenance, her start-ups were hiring, and Taylor was submitting a bid each time an applicable government project popped up.

Her perseverance paid off this summer with a three-year, $189,000 maintenance contract with Lambert-St. Louis International Airport -- an agreement, ironically, which threatened to stop Taylor dead in her entrepreneurial track.

"This was the biggest contract we ever had, but we couldn't do a thing with it because we weren't bonded," the 31-year-old Taylor explained. "You're not going to grow (as a business) unless you get bonded."

Taylor had run head-on into a business reality that's been around since the end of the 19th century, when Congress passed legislation to prevent the cost of unfinished public projects from being passed along to taxpayers.

Well over a century later, surety bonds remain a critical hurdle for small business owners seeking legitimacy.

Many would-be entreprenuers leap into business without examining all the complexities, including the need for bonding, said Harry Moppins, the St. Louis Airport Authority's assistant director for community programs. "There are a lot of tools essential to business. Not only bonding, but also legal advice, an accountant, even an e-mail account."

Legal counsel and accounting are self-explanatory. But a fair number of Americans still draw a blank when it comes to how surety bonds work and why they are important, said Mark McCallum, chief executive of the National Association of Surety Bond Producers in Washington.

And a big part of the problem, he continues, resides in a general misconception that bonding is far more complicated than it really is.

"It's a guarantee and a qualification that, yes, a third party believes a company will fulfill its contractual obligation," said McCallum.

In essence, a surety bond is an insurance policy.

Written by a third party, the bond promises to cover the cost of a project should a contractor or subcontractor fail to meet the terms spelled out in its agreement with a private or public entity.

The cost of the bond - a percentage of the cost of the project that can run up to five percent - is absorbed by the contractor.

Prior to issuing a bond, the underwriter reviews the company's cash flow, payroll, credit rating, capital holdings and most importantly, in McCallum's view, its reputation for reliability on smaller jobs.

"It's a credit-assessed transaction," said Michael Williams, the president of Minnesota-based CCI Surety which boasts of being the largest underwriter of small business bonds in the country.

The airport authority required Taylor to secure a bond after her maintenance subsidiary, Stello Cleaning LLC, secured the the winning bid to maintain a 289-acre Bridgeton subdivision the authority razed in the 1990s for an expansion of Lambert that never materialized.

The winning bid came three years after Taylor struck out on her own after correctly concluding her full-time employer, the U.S. Postal system, would gradually curtail its services.

She continued to deliver mail by day and clean offices by night until last year.

The bonding requirement in the airport contract exposed Taylor to a process that small business advocates say puts start-ups hoping to move to the next level at a disadvantage in the competition for government contracts:

"The issue is how do (small businesses) get on a speeding train that isn't going to stop for them," said Richard Sacks, whose St. Charles financial consulting firm, the Sacks Group, is assisting Taylor. "That's why so many small businesses fail."

It is also why the Small Business Administration, as well as state and local agencies - including the airport authority - sponsor seminars to familiarize and demonstrate to start-ups that the best way to overcome the hump is to build a business - and with it a reputation for reliability - slowly.

Surety bonds represent "a major expense, especially to small businesses," said Moppin. "They have to understand how the process works."

Taylor got the picture immediately: No bond, no airport contract.

An insurance representing Taylor made 13 calls before call number 14, to Ox Bonding in New York, proved to be the charm.

A five-foot, 3-inch dynamo with no shortage of self-confidence and a new-found understanding of how bonds work, Taylor now maintains her company's ability to land the airport contract was never in doubt.

"Some people hate to hear,'no,'" she said. "But I love to hear 'no." It motivates me, and I know that, one way or another, I'm going to get it."