Surety Bond News

The Federal Stimulus fund will refund surety bond premiums for contractors ARRA transportation infrastructure contracts.

See: Disadvantaged Business Enterprise American Recovery and Reinvestment Act Bonding Assistance Reimbursable Fee Program (DBE ARRA BAP)

“This new program, which will be administered by the Department of Transportation’s Office of Small and Disadvantaged Business Utilization (OSDBU), allows small and disadvantaged businesses to apply to be reimbursed for bonding premiums and fees incurred when competing for, or performing on, transportation infrastructure projects funded by ARRA. The program will be especially helpful for businesses with traditionally less working capital than larger contractors.”

The headline sure catches the eye, but how realistic is it? According to the site, only “small and disadvantaged businesses” can apply. When you read further down, it seems that they classify these businesses by their low working capital; one of the main items looked at when reviewing a contractor’s surety capacity.

Fortunately, it does allow the SBA bonded contractors to apply. However, SBA contractors’ bond lines are often reduced due to their lines of credit being reduced or terminated (SBA counts LOCs as working capital).

In other words, the government is willing to provide stimulus funds to refund contractors’ bond premiums, but only for contractors that don’t actually qualify for surety bonding.

Have you wondered what locations in the country are getting the most from the stimulus package? We created a new search tool to help you find where the stimulus funds are being spent. The tool even allows you to filter out criteria by job type, size, and location. If your a contractor in need of work, this should be a great place to start!

See: Stimulus Work Search Tool

What do you think? Is anywhere getting too much money? Is anywhere getting not enough? Leave us a comment, we want to hear from you!

The stimulus package is absolutely gigantic. So much so, I thought I would create a list of pros and cons related to the construction industry pertaining to the bill. Many of the cons are items that the industry was pushing for, but did not get.

Overall, the bill looks like a victory for the construction and surety industries. See below for details.

The Federal government’s stimulus package will no doubt impact the surety industry. Will it mean business as usual for contract bond agents or a boom like we have never seen before?

The sheer size of the bill is absolutely daunting to put it lightly. The bill includes roughly 130 billion in funds towards construction related projects. It is the largest infrastructure investment seen in this country for the last 50 years. Unfortunately, it is impossible to come up with an exact number for construction spending, as the bill allows some departments freedom to use the funds for non-construction related expenses (see: Revovery Bill).

Stimulus Package Details

The website www.recovery.gov is dedicated by the government to keep Americans in the loop on where funds are being spent; it is currently vague at best with a bar graph including some categories of where funds are to be spent. A link below the graph titled “learn more” shows us the same figues in a bubble chart. I doubt showing the same information in a different chart format will appease many.

In all fairness, the bill was just passed yesterday so it might be a bit early to expect detailed information on the www.recovery.gov site. However, I am sure people will begin to demand more details to be provided since this is suppose to be an attempt at transparency through the use of the web.

The Engineering News Record posted an article on 2/13/09 entitled, The Stimulus Bill Compromise, Sector by Sector. They did a better job at breaking out the spending, specifically what applies to the surety industry. According to ENR, the major categories are appropriated as follows:

Transportation – $49.3 Billion

• Highways: $27.5 billion
• Transit: $8.4 billion
• New discretionary grant program: $1.5 billion for highways, transit, rail, seaports, other projects. U.S. Dept. of Transportation would choose which projects would be funded
• Airport Improvement Program construction grants: $1.1 billion
• Rail: $9.3 billion, including allocations for Amtrak and high-speed rail
• Port, transit, rail security: $300 million
• DHS/Transportation Security Administration, procure, install airport explosives-detection, baggage-scanning equipment, $1 billion
• Coast Guard, bridge alterations $142 million
• Coast Guard, acquisition, construction, improvements $98 million

ENERGY – $30.62 Billion

• Electricity grid, including “Smart Grid” activities: $11 billion
• Home weatherization assistance: $5 billion
• Energy efficiency and conservation grants: $6.3 billion
• Renewable-energy loan guarantees: $6 billion
• Carbon capture and sequestration demonstration projects, $1.52 billion
• Clean Coal Power Initiative, round III $800 million

WATER AND ENVIRONMENT – $20.1 Billion

• DOE environmental cleanup: $6 billion
• EPA Clean Water and Drinking Water funds: $6 billion
• EPA cleanup, including Superfund: $1.2 billion
• Agriculture Dept., rural water and waste disposal facilities: $1.28 billion appropriations, to support $3.8 billion in loans and grants
• Corps of Engineers civil works: $4.6 billion
• Bureau of Reclamation: $1 billion

BUILDINGS – $13.365 Billion

• GSA federal buildings, energy-efficiency upgrades: $4.5 billion
• Border stations, ports of entry: $300 million
• Facilities on federal and tribal lands:$3.1 billion
• Fire stations (federal grants): $210 million
• GSA new Dept. of Homeland Security headquarters, $450 million
• GSA U.S. Courthouses, other federal buildings, $300 million
• Agriculture Dept. bldgs/facilities $ 200 million
• Agriculture Dept. rural facilities $130 million (supports $1.234 billion in loans)
• NIST construction $360 million
• NOAA procurement, acquisition and construction $430 million
• NASA construction (hurricane damage repairs) $50 million
• National Science Foundation academic facilities modernization $200 million
• NSF major research equipment and facilities construction $400 million
• DHS consolidation $200 million
• DHS ports of entry $420 million
• Smithsonian facilities, $25 million
• National Institutes of Health, grants for construction, renovation of non-NIH research facilities, $1 billion
• NIH buildings and facilities (construction, renovation) $500 million
• Social Security Administration, National Computer Center replacement, $500 million
• State Dept. Capital Investment Fund, $90 million

SCHOOLS – Unknown

Roughly $39.5 billion out of the $53.6 billion total for the State Fiscal Stabilization Fund is set aside for local school districts. These funds allow for school modernization, but a precise amount for construction purposes is undecided at this time.

HOUSING/HUD $9.6 Billion

• HUD Public Housing Capital Fund: $4 billion
• HUD redevelopment of abandoned and foreclosed homes: $2 billion
• HUD energy retrofits, “green” projects in HUD-assisted housing projects: $250 million
• HUD Community Development Block Grants (housing, services, infrastructure): $1 billion
• HOME investment partnerships program $2,250
• Lead paint abatement $100

Defense & Veterans – $7.78 Billion

• VA: $1.25 billion for hospital and other medical facility construction and upgrades
• DOD: $4.240 billion for “facilities sustainment, restoration and modernization,” includes energy-efficiency improvements, plus repair and modernization of DOD buildings, including medical facilities.
• DOD: $2.33 billion for facilities projects, including housing, hospitals, child-care centers, other military “quality of life” projects.

OTHER – $100 Million

• Security, border fencing, infrastructure, technology $100 million

Below you will find a chart that breaks out the details of spending towards construction. The size of the chart speaks to the size of the bill, as we could not fit the graphic properly on the blog. Please click here for a full sized version of the chart.

Bull Or Bear Surety Market?

All of this government spending must lead to a large surge in surety premium, right? Of course, but will it offset the slump seen due to the current economic conditions? John Welch, President of CNA stated the following during CNA’s 2008 4th qtr. earnings call on 2/6/09:

“The infrastructure part of the stimulus package from best I could tell looks to be anywhere $70 to $80, $90 billion, which is good and it’s great and we need it, but it still is relatively a small part of the overall construction spending in a full year.”

Does this mean that an expert such as Mr. Welch is bearish on a surety premium boom? Think again…In the same CNA meeting Mr. Welch stated:

“Our production was supported by the continued spending on public construction offset to some degree by the drop off in the private market. While there are strains on public construction spending, talk of a government stimulus package including public infrastructure spending give us some encouragement going forward.”

In other words, we are going to need to wait to see how this all plays out.

SBA Changes

The SBA announced today that they will receive $730 million from the bill. What does this mean for the surety industry? How about a raise on the maximum allowable contract amount for the SBA Surety Bond Program from $2 million to $5 million, a 250% increase. In special circumstances, the SBA can now even consider contracts up to $10 million, or a 500% increase! The additional funds will also be used to expand the program further.

Conclusion

The economy has seen better days. Every day on the news we all hear about more layoffs from industry to inudstry. Hopefully the stimulus bill is the begining of our road to recovery.

As one might guess, there is no clear answer on how the surety industry will weather this recession. Even the experts cannot predict what is going to happen, as this is uncharted territory for our industry and the country as a whole.

Personally, I am an optimist and see the surety industry getting through this crisis better than most other industries. This is something we will all have to watch as it unfolds.

Are you bullish or bearish on the surety industry? Leave a comment below!

Our agency has been getting contacted by numerous government officials as of recent; state, Federal, military, etc. All of them have questions about how to best handle bonding requirements for upcoming government contracts from the upcoming stimulus package. This is not new territory for us, as we have various government departments revise bond forms and create new requirements throughout the years. We expect to hear from many more seeking advice in the coming months. The current stimulus package proposal calls for 180 billion for infrastructure. An investment larger than any other since the creation of the interstate!

The flurry of requests for advice prompted me to compile this list of tips on what government workers need to think about when creating contracts. This post will be updated as more questions come in. Feel free to ask a question in the comment box below or by using our agency’s contact email form. Should you find this page useful, please be sure to create a link to it on your department’s website to ensure it is reviewed by those who need it.

Break Up Large Contracts
It may require a little more work to do, but breaking up large contracts into several smaller ones is a good idea. Doing so allows smaller contractors to get involved, that would otherwise not qualify due to bond line limitations. This means that there will be increased competition for each bid. The recession has hit the balance sheets of contractors throughout the country, often resulting in reduced bonding capacity. Don’t limit your projects to the largest of contractors by not breaking up contracts when possible.

Less Than 100% Requirements Are A Waste
At times, government policies do not meet real world situations. The intentions may be good, but failures to consult industry professionals result in useless or harmful policy. Requiring a bond less than 100% of the contract amount is a prime example (see: FAR 28.102-2). Bonding companies underwrite and charge based on contract amounts, not bond amounts. Therefore, requesting less than a 100% bond only lowers the maximum amount that can be filed for any possible claims. It does not allow for smaller contractors to participate as intended.

Use AIA Standard Forms
A bad bond form can make a contract “unbondable”. Keep in mind, the bond form declares precisely what the bonding company is guaranteeing on behalf of the contractor. Therefore, if they don’t like the terms of it, they will not write it, even if the contractor qualifies for the bond amount. The AIA has standardized bond forms that should be used when possible. Doing so will protect the government from a defaulting contractor properly and ensure a smoother process for all involved.

Do you have questions of suggestions of your own? Please feel free to comment below!