At its peak in 2007, the U.S. construction industry employed more than 7.5 million Americans. Since then, more than 2 million contractors and construction workers have lost their jobs, according to the U.S. Bureau of Labor Statistics. The unemployment rate for people in this market is more than twice the national average. It seems that everyone knows someone who has been affected: a nephew who can’t make ends meet anymore as a roofer or a son-in-law who is in the painting business and can’t catch a job.
It wasn’t supposed to happen this way. After the U.S. government announced its stimulus package in 2008, billions of dollars went into banks and insurance companies in an effort to keep credit moving through the economy. One of the main purposes of the $700 billion Troubled Asset Relief Program (TARP) was to encourage banks to lend again at levels before the start of the recession–both to consumers and other banks.
But the opposite has happened. Despite TARP, lending is still well below pre-recession levels, 2 years after the government announced the official end of the recession. Rather, 75 percent of banks have tightened their lending standards since the recession hit, making it harder for contractors to get working capital to see their way to the end of a job. And despite public spending on infrastructure reaching an all-time high in 2010, insurance companies have made it tougher to secure the surety bonds that are required for this sort of work. Without a bonding line, contractors can’t bid for work, and even if they could, without a credit line they can’t fund the job anyway.
Traditionally, surety has been difficult for many agents and contractors to navigate. A lot of time and paperwork goes into the application, with no guarantee that the contractor will be approved for the bond in the end.
The process is nothing new for Robert Berman; he watched his father, a small general contractor in upstate New York, struggle through the process years ago. "I remember sitting with my father at the dinner table one night 35 years ago and watched as the local insurance agent turned him down for a surety bond," said Berman, who spent more than 25 years as a contractor, developer and project manager. "My father was humiliated. Here is a man who never went bad on a job, was a member in good standing of the community for over 30 years and was as honest as the day is long, and he couldn’t get a bond because his financials weren’t good enough. What does that have to do with performing a job?"
Today, as CEO of Cinium Financial Services, Berman provides bonding, credit and support services to small and midsized commercial contractors. Cinium is the holding company for Upper Hudson National Insurance Co., a licensed and admitted carrier in 16 states, with surety authority in 12 of those, including California, New York, Illinois and Florida. Ox Bonding Insurance Services its licensed agency and the brand under which we market.
"It’s tough out there right now for contractors," Berman said. "There are a lot of good, capable contractors who can’t find work, and when they can land a job nobody will bond them or give them the working capital they need to get through it. This just isn’t right, so we set out to do something to help our clients get back to work."
In March, Ox Bonding launched its Contractor Credit Program (CCP), designed to provide contractors with access to bonding and working capital when they have nowhere else to turn.
Remembering his father’s experiences, Berman decided to take a different approach to bonding. "We aim to be partners with our clients. We underwrite by looking at a contractor’s experience and character, not their credit score. If a contractor has the experience to perform a job, what do I care if he bought a condo in Florida in 2007 and missed on his payments?"
The risks for an insurance company when issuing a payment and performance surety bond are straightforward. The first risk is that the contractor can’t "perform" as required in the contract being awarded. Unlike most surety companies, Ox Bonding staffs its underwriting departments with people with construction backgrounds. "We need to know that a contractor can perform the job, and the only way to know that is have people who know construction looking at the contractor and the job they are bidding," Berman said. "When you look at our underwriting department, you would think it was running a construction project rather than an insurance company."
The other risk is that the contractor doesn’t make "payments" as required under the contract. "Job borrowing" is common in the industry, and probably the biggest reason for claims, Berman said. Ox Bonding’s mandatory funds control eliminates this risk, while saving time and money for the contractor. It is also an added layer of protection for the project owner.
"At first, some contractors don’t like the idea of money flowing first to us, but once we explain the benefits, they have come to see this as a real help to them. We administer funds in-house, and our team has on average more than 20 years of experience in the back-office of major construction firms. Money clears into our account the same day; we make payments as indicated in the schedule of values, collect lien waivers and issue the contractor his profit all usually within 48 hours. The contractor even gets an email telling him the funds were received, payments made and his profit deposited as instructed. It saves them time and makes sure they don’t miss a payment. In the end, we’re helping to improve their credit score."
Banks are still very reluctant to lend to construction projects, cutting contractors off from lines of credit and leaving some relying on their dwindling savings, or, still worse, their credit cards. Ox Bonding’s most popular service is its working capital advance program, which can advance up to 90 percent of an approved requisition, starting on the second one. Ox Bonding charges a one-time processing fee and no monthly payments. "When we advance working capital to a contractor, we ask if they would like us to negotiate an early payment discount for them with their suppliers. In most cases the discounts more than offset our processing fee for the advance. The contractor makes money and the supplier gets paid early—everyone is happy."
By streamlining the process, the CCP product also provides agents who sell it an annuity-like commission stream, receiving a full commission on every final bond issued to enrolled clients.
"Our agent network is very important to us, and we want to help them get their clients bonded," Berman said. "We work with many surety-only agents, but more often than not we get bonds from agents who are writing other lines for contractors. The key is to make the process fast and easy for them."
The Contractor Credit Program seems to solve many of the problems facing contractors today. The application process is short and simple, and once accepted into the program contractors get access to bonding as well as working capital advances, bill pay services, supplier discount negotiations and other helpful services. As Berman noted, "We want our clients to be successful, so the more we can do to help them, the better off everyone is."
Ox Bonding’s clients seem to agree. Dennis Roberts, president of Rocon Contracting, of Brielle, N.J., has been bonded by Ox Bonding and used its working capital advance program. "The advance pay option has truly helped us with our cash flow on these projects," Roberts said. "Additionally, the quick pay has enabled us to negotiate considerable discounts with our subs, suppliers and vendors."
Kim Paulicelli of Premier Mechanical, Lindenhurst, N.Y., likes the assortment of services designed to help her do her job better. "The additional services now being offered are presented with the clear intention of helping the small business compete and succeed in a very difficult economy," she said.
"We don’t want to be a typical surety or a traditional bank; in fact, we look at ourselves as the ‘un-bank,’" Berman said. "Construction is the backbone of America. Without a strong construction industry, there won’t be a recovery. I’ve been in construction my whole life, as have many of the people working at Ox Bonding. I know contractors. No one is looking for a handout. These are hard-working people. All they are looking for is a fair chance to bid on jobs and the resources to perform what they are hired to do. And that is what we are trying to do at Ox Bonding."