Small Business: Construction Firms' Access to Surety Bonds (Fact Sheet,
06/26/95, GAO/RCED-95-173FS).
Pursuant to a legislative requirement, GAO surveyed small construction
firms' access to surety bonds, focusing on the experiences of minority
and women contractors.
GAO found that: (1) 7.2 percent of the minority-owned firms surveyed had
obtained surety bonds before 1990; (2) the minority-owned firms tended
to be smaller, had less construction experience, and were more likely to
have obtained their first bond before 1990; (3) minority- and
women-owned firms were routinely asked to provide certain types of
financial documentation and collateral to obtain a bond; (4)
minority-owned firms were more likely to have been denied surety bonds,
and often lost opportunities to bid for bonds because of the length of
time it took to obtain a bond; (5) the minority and women-owned firms
that did not obtain surety bonds were usually not required to have
bonds; and (6) the minority and women-owned firms surveyed rarely bid on
projects that required bonding.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-95-173FS
TITLE: Small Business: Construction Firms' Access to Surety Bonds
DATE: 06/26/95
SUBJECT: Surety bonds
Minority contractors
Small business contracts
Small business contractors
Construction contracts
Construction industry
Surveys
Bid guarantees
Women-owned businesses
Small business assistance
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Cover
================================================================ COVER
Fact Sheet for Congressional Committees
June 1995
SMALL BUSINESS - CONSTRUCTION
FIRMS' ACCESS TO SURETY BONDS
GAO/RCED-95-173FS
Access to Surety Bonds
Abbreviations
=============================================================== ABBREV
CPA - certified public accountant
GAO - General Accounting Office
SBA - Small Business Administration
Letter
=============================================================== LETTER
B-261207
June 26, 1995
The Honorable Christopher S. Bond
Chairman
The Honorable Dale Bumpers
Ranking Minority Member
Committee on Small Business
United States Senate
The Honorable Jan Meyers
Chair
The Honorable John J. LaFalce
Ranking Minority Member
Committee on Small Business
House of Representatives
Federal law currently requires contractors to provide certain types
of surety bonds on all federal construction contracts worth over
$25,000.\1 Surety bonds ensure that should a bonded contractor
default, a construction project will be completed and the
contractor's employees and material suppliers will be paid. Most
state and local governments and some private-sector lenders also
require construction firms to be bonded. Surety companies, or the
entities that issue surety bonds, decide whether firms have the
necessary experience and financial capability to perform a given job
and thus to qualify for a bond.
It is not unusual for a small construction company to have some
difficulty in obtaining a surety bond. In approving bonds, the
surety companies seek to reduce their risk by examining, among other
factors, a firm's experience in construction; specialization and
record in doing the same type of work; and financial viability,
corporate tax returns, and bank lines of credit. Some of the
documents the firms must provide are readily available to them;
others, such as a review or audit by a certified public accountant,
may result in additional costs. Those firms that the surety
companies consider more risky may be asked to provide collateral or
meet other conditions to obtain a bond. According to the surety
companies, decisions on approving bonds are made on a case-by-case
basis and may take some time while the contractor assembles the
required information and answers the surety company's questions and
the surety company verifies the information. If the processing time
for the bond is long, the firm may lose the opportunity to bid on a
job.
Some small construction firms have contended that surety companies'
decisions to approve or deny bonds can seem arbitrary. As a result,
they have asserted that such decisions can impede the development of
small firms, especially those owned by minorities and women. Because
limited data existed on this issue, the Small Business Access to
Surety Bonding Survey Act of 1992\2 directed us to survey small
construction firms for information on their experiences in obtaining
bonds from surety companies from 1990 through 1993 and to report to
the House and Senate Committees on Small Business. The act directed
us to examine in particular the experiences of firms owned by
minorities and women.\3
Our survey--a random sample of 12,000 construction firms, of which
about 98 percent were small enough to be eligible for the Small
Business Administration's (SBA) programs\4 --focused on (1) the
firms' overall rate of obtaining bonds; (2) the characteristics of
the small firms that performed bonded work; (3) the recent
experiences of these firms in obtaining bonds, including how they
obtained bonds, whether they lost opportunities to bid because of the
length of time it took to get a bond, what documentation they had to
provide to obtain a bond, how often they were denied a bond, how much
they paid in fees for bonds, how much bonded work they performed, and
whether the amount of bonding they received had increased; and (4)
the characteristics of those firms that did not perform bonded work,
including their reasons for not doing such work.
The results of our survey generalize to about half of the firms
currently in business, primarily in construction, that meet the
eligibility criteria for SBA's programs. Our results do not
generalize to firms that would not have responded to our survey,
which are more likely to be smaller. Details of the limitations on
our survey data are presented in appendix I.
--------------------
\1 The Federal Acquisition Streamlining Act of 1994 increased this
amount to $100,000, effective Oct. 1, 1995.
\2 This act is contained in the Small Business Credit and Business
Opportunity Enhancement Act of 1992.
\3 In our survey, we defined a minority-owned firm as one in which at
least 51 percent of the firm was owned by individuals from one or
more of the following groups: African American, Hispanic, Asian
American, Native American, or Pacific Islander. We defined a
women-owned firm as one in which at least 51 percent of the firm was
owned by women.
\4 To be eligible for SBA's programs, firms must have average annual
revenues, over a 3-year period, not exceeding $17 million if the
firms are in general building construction (e.g., commercial and
industrial construction) and heavy construction (e.g., roads and
bridges) and $7 million if the firms are special trade contractors
(e.g., plumbers, painters, electrical contractors, and concrete
masons).
SUMMARY
------------------------------------------------------------ Letter :1
Our survey showed the following.
OVERALL RATE OF OBTAINING
BONDS
---------------------------------------------------------- Letter :1.1
At least 23 percent of the small construction firms had obtained
bonds, and a maximum of 77 percent had never obtained bonds.
Section 1 of this report gives more details on this estimate.
CHARACTERISTICS OF FIRMS
THAT HAD OBTAINED BONDS
---------------------------------------------------------- Letter :1.2
About 4 out of 10 firms that had obtained bonds had annual revenues
less than or equal to $500,000, had an average of 20 years of
experience in construction, and had likely first obtained bonds
before 1990.
The minority-owned firms, which made up 7.2 percent of the firms
that had obtained bonds, tended to be smaller, had less
construction experience, and were more likely than the firms not
owned by minorities to have obtained their first bond since
1990.
The women-owned firms, which made up 11.1 percent of the firms that
had obtained bonds, had less construction experience, and had
likely obtained their first bond more recently than the firms
not owned by women.
Section 2 of this report gives more details about the characteristics
of these firms.
FIRMS' RECENT EXPERIENCE
WITH BONDING
---------------------------------------------------------- Letter :1.3
Of the firms with recent experience with bonding (1990-93), about 1
out of 10 had used federal, state, or local bonding assistance
programs to obtain bonds. The firms that used government
assistance tended to be smaller, more likely to have been
previously denied a bond, and more likely to have obtained their
first bond since 1985.
The firms reported that they were routinely asked to provide
financial statements and other documents to obtain a bond.
About one out of four firms reported that they were also
required to provide collateral, and a similar proportion of
firms said they were required to meet other conditions (such as
establishing an escrow account controlled by the surety company)
to obtain a bond. The minority and women-owned firms were more
likely to be asked for certain types of financial documentation.
The minority-owned firms were also more likely to be asked to
provide collateral and meet other conditions than the firms not
owned by minorities.
Nearly one out of five firms that had obtained bonds in 1990-93 had
also been denied a bond in that period. The minority-owned
firms were more likely to have been denied a bond. The
minority-owned firms were also more likely to say they had lost
an opportunity to bid because of the length of time it took to
obtain a bond.
The fees paid for bonds varied depending on the size of the firm.
In addition, the women-owned firms paid a lower fee than other
firms for the first $100,000 of their bonds. We did not detect
differences in the fees paid by the minority-owned firms
compared with those paid by the firms not owned by minorities.
About a quarter of the firms with recent bonding experience had
only obtained bonds valued under $100,000. Because of the new
bonding thresholds set out by the Federal Acquisition
Streamlining Act of 1994, which increased the minimum federal
contract amount for which a bond is required from $25,000 to
$100,000, it is likely that fewer firms will require bonds in
the future.
Section 3 describes in more detail the experiences of the firms that
had obtained bonds from 1990 through 1993.
FIRMS THAT HAD NOT OBTAINED
BONDS
---------------------------------------------------------- Letter :1.4
Four out of five small construction firms had not obtained bonds
because they were not asked to get them or did not bid on
projects that required bonding. The minority- and women-owned
firms that did not obtain bonds said they were not required to
have bonds or did not bid on projects that required bonding.
Section 4 describes in more detail the characteristics of these firms
and their reasons for not obtaining bonds.
SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :2
We surveyed 12,000 firms randomly selected from a list of special
trade contractors, general building contractors, and heavy
construction contractors maintained by Dun & Bradstreet.\5 The survey
focused primarily on small firms; that is, those meeting the size
standards for SBA's programs.
In describing differences in bonding experience by size or ownership
(the ethnicity or gender of the owner), we discuss only those
differences that are statistically significant.\6
It should be noted that the absence of a statistically significant
difference does not mean that a difference does not exist--the sample
size or number of respondents to a question may not have been
sufficient to allow us to detect a difference. This report does not
identify causes of significant differences. It is also important to
note that we are only presenting the information reported to us by
the firms. We did not verify this information. Details of our scope
and methodology are presented in appendix I. A supplement to this
report gives the detailed responses to our survey questions broken
down by the size of the firm and the gender and ethnicity of the
owner.\7
We conducted our work between June 1993 and May 1995. We discussed
the information in this report with representatives of the surety
industry and small business, including SBA's Associate Administrator
for Surety Guarantees; the President, Surety Association of America;
and the executive directors of the American Subcontractors
Association, National Association of Minority Contractors, and Women
Construction Owners and Executives. These representatives generally
agreed that we had used a reasonable approach for the survey.
--------------------
\5 General contractors for and builders/developers of single-family
residences were not included in our survey.
\6 Statistical significance means that observed differences between
the subgroups are larger than would be expected from sampling error.
Sampling error is the maximum amount by which results obtained from a
statistical sample can be expected to differ from the statistic we
are estimating.
\7 Small Business: Responses to Survey on Construction Firms' Access
to Surety Bonds (GAO/RCED-95-173S). For a copy of this supplement,
return the postcard included in this report. If the postcard is
missing, please address your request to: U.S. General Accounting
Office, P.O. Box 6015, Gaithersburg, MD 20884-9965. The figures in
this report are cross-referenced to information in that report.
---------------------------------------------------------- Letter :2.1
We are sending copies of this report to the Administrator, SBA, and
the Director, Office of Management and Budget. We will also make
copies available to others on request.
Please call me at (202) 512-7631 if you or your staff have any
questions. Major contributors to this report are listed in appendix
II.
Judy A. England-Joseph
Director, Housing and Community
Development Issues
FIRMS' OVERALL RATE OF OBTAINING
SURETY BONDS
============================================================ Chapter 1
We estimate that at least 23.4 percent (+/- 1.1 percent) of the small
construction firms, or an estimated 159,807 firms, had obtained bonds
or had approved bonding lines.\1
As figure 1.1 shows, we also estimate that a maximum of 76.6 percent
(+/- 1.1 percent) of the firms had never obtained bonds or had
bonding lines.
Figure 1.1: Percentage of
Small Construction Firms That
Had Obtained Bonds
(See figure in printed
edition.)
The actual percentage of small construction firms that obtained bonds
could be higher than 23.4 percent (+/- 1.1 percent) but is unlikely
to be more than 43.2 percent (+/- 1.4 percent). These upper and
lower limits are based on information from both our mail survey and a
follow-up by telephone to the mail survey. In the mail survey, 43.2
percent (+/- 1.4 percent) of the respondents had obtained bonds.
However, survey respondents were more likely than nonrespondents to
have obtained bonds. When we adjust for this finding and generalize
to all small construction firms, including those no longer in
business, we can confidently estimate that at least 23.4 percent (+/-
1.1 percent) of the firms had obtained bonds.
While we are able to estimate the overall rate of obtaining surety
bonds among small construction firms, we are not able to generalize
the survey results presented in sections 2, 3, and 4 to all the
firms. In these sections, we generalize results to a portion of the
universe, on the basis of the response rate to the mail survey.
--------------------
\1 A bonding line is the total amount of bonds that a surety company
is willing to provide to a construction firm.
CHARACTERISTICS OF FIRMS THAT HAD
OBTAINED SURETY BONDS
============================================================ Chapter 2
Overall, the small construction firms that had obtained bonds\1
had annual revenues averaging $1.6 million, although 40 percent had
revenues under $500,000;
averaged 20.4 years of construction experience; and
were likely to have obtained their first bond before 1990.
The minority-owned firms differed from the firms not owned by
minorities in that they
were more likely to be small--51.4 percent of the firms had annual
revenues under $500,000,
had about 6 years less experience in construction, and
had likely obtained their first bond later than the firms not owned
by minorities.
The women-owned firms differed from the firms not owned by women in
that they
had somewhat less construction experience--18.5 years, compared
with 20.7 years for the firms not owned by women--and
had likely obtained their first bond later than the firms not owned
by women.
In this section, we discuss the business characteristics of the firms
that had obtained surety bonds. In section 4, we discuss the
business characteristics of the firms that had never obtained bonds
and the reasons why.
--------------------
\1 This discussion generalizes to an estimated 119,560 small firms.
SIZE AND OWNERSHIP
---------------------------------------------------------- Chapter 2:1
For purposes of our survey, we grouped the small firms that met the
size standards for SBA's programs into three categories:
"smallest"--those firms with average annual revenues less than or
equal to $500,000; "medium-size"--those firms with average annual
revenues over $500,000 and up to $3.5 million; and "larger"--those
firms with average annual revenues over $3.5 million but under SBA's
revenue maximum.
The smallest firms accounted for 40.0 percent of the firms that had
obtained bonds, as shown in figure 2.1. In contrast, the larger
firms accounted for 12.1 percent of the firms that had obtained
bonds.
Figure 2.1: Breakdown of Firms
Obtaining Bonds, by Size
(See figure in printed
edition.)
Note: Percentages may not add to 100 because of rounding.
Source: Table 2.1, Small Business: Responses to Survey on
Construction Firms' Access to Surety Bonds (GAO/RCED-95-173S, June
26, 1995).
Minority- and women-owned firms made up a small proportion of the
total number of the small construction firms that had obtained bonds.
Our survey indicated that 7.2 percent of the firms that had obtained
bonds were owned by minorities, and 11.1 percent were owned by women.
CONSTRUCTION EXPERIENCE
---------------------------------------------------------- Chapter 2:2
The firms that had obtained bonds had an average of 20.4 years of
construction experience. As shown in figure 2.2, the larger firms
tended to have more experience than the firms of other sizes, and the
minority and women-owned firms tended to have less experience than
the firms not owned by minorities and women.
Figure 2.2: Construction
Experience of Firms Obtaining
Bonds, by Size and Ownership
(See figure in printed
edition.)
Note: The difference in construction experience between the smallest
and medium-size firms was not significant.
Source: Tables 2.3a, 2.3b, and 2.3c, GAO/RCED-95-173S.
TYPE OF WORK
---------------------------------------------------------- Chapter 2:3
As shown in figure 2.3, firms in special trade construction such as
plumbers, painters, concrete masons, and electrical contractors,
accounted for 65.0 percent of the firms that had obtained bonds.
Figure 2.3: Specialization of
Firms Obtaining Bonds
(See figure in printed
edition.)
Source: Table 2.5a, GAO/RCED-95-173S.
As shown in figure 2.4, more than half--58.0 percent--of the
minority-owned firms that had obtained bonds were in special trade
construction. However, a higher percentage of the minority-owned
firms that had obtained bonds specialized in heavy construction than
the firms not owned by minorities.
Figure 2.4: Specialization of
Firms Obtaining Bonds, by
Ethnicity of Owner
(See figure in printed
edition.)
Source: Table 2.5b, GAO/RCED-95-173S.
In addition to performing certain types of construction work, firms
can function either as general contractors, working directly for
owners, or as subcontractors, working for the general contractors.
We observed the following differences regarding the firms' work as
general contractors and as subcontractors:
51.3 percent of the firms functioned more as subcontractors than as
general contractors.
42.5 percent of the firms functioned more as general contractors.
The remaining 6.3 percent did equal amounts of work as general
contractors and subcontractors.
YEAR OF OBTAINING FIRST BOND
---------------------------------------------------------- Chapter 2:4
Most of the firms that had obtained bonds had been performing bonded
work for several years.
51.1 percent of the firms had obtained their first bond before
1985.
23.8 percent had obtained their first bond between 1985 and 1989.
The remaining 25.2 percent had obtained their first bond in 1990 or
later.
The minority- and women-owned firms obtained their first bond later
than other firms. As shown in figure 2.5, 41.7 percent of the
minority-owned firms had obtained their first bond since 1990, while
76.6 percent of the firms not owned by minorities had obtained their
first bond before 1990.
Figure 2.5: Year in Which
Minority-Owned Firms and Firms
Not Owned by Minorities
Obtained First Bond
(See figure in printed
edition.)
Source: Table 2.7b, GAO/RCED-95-173S.
As shown in figure 2.6, 55.2 percent of the women-owned firms had
obtained their first bond since 1985, compared with 47.5 percent of
the firms not owned by women.
Figure 2.6: Year in Which
Women-Owned Firms and Firms Not
Owned by Women Obtained First
Bond
(See figure in printed
edition.)
Source: Table 2.7c, GAO/RCED-95-173S.
FIRMS' RECENT EXPERIENCES IN
OBTAINING BONDS
============================================================ Chapter 3
Nearly three-quarters--72.0 percent--of the small construction firms
had obtained bonds since 1990.\1 Their involvement with bonding is
characterized by the following experiences:
About seven out of ten firms obtained their bonds through an agent
who specialized in bonding. Few of the firms used government
bonding assistance programs.
Most of the firms obtained their first bond in 30 days or less.
The firms reported that they were routinely asked to provide
financial statements and other documents to obtain a bond.
About one out of four firms reported being asked to provide
collateral, and a similar proportion of firms reported being
required to meet other conditions (such as establishing an
escrow account controlled by the surety company) to obtain a
bond.
About one out of five firms obtaining a bond between 1990 and 1993
had also been denied a bond at least once during those years.
Most of the firms perceived that the requirements for obtaining a
bond had remained the same or tightened over the last 5 years.
About half of the firms paid nothing for bid bonds\2 in 1993. The
larger firms were less likely to pay for bid bonds and paid
lower fees for payment and performance bonds than the
medium-size and smallest firms.
About one-third of the firms' 1993 construction revenues were
generated from jobs that required bonds.
Most firms that reported information about their bonding capacity
had experienced an increase or no change from 1990 to 1993 in
the largest bond or aggregate amount of bonds that the surety
companies would approve.
A quarter of the firms with recent bonding experience had only
obtained bonds valued under $100,000 in 1993. Because of new
bonding thresholds set out by the Federal Acquisition
Streamlining Act of 1994, which increased the minimum federal
contract amount for which a bond is required from $25,000 to
$100,000, it is likely that fewer firms will require bonds in
the future.
The experiences of the minority-owned firms differed from those of
the firms not owned by minorities in several areas. For example,
these firms
were more likely to be asked to provide certain types of financial
documentation, as well as to provide collateral or to meet other
conditions;
were more likely to be denied a bond and to report losing an
opportunity to bid because of delays in processing their request
for a bond; and
were more likely to depend on jobs requiring bonds for a higher
proportion of their revenues.
The women-owned firms differed from the firms not owned by women in a
few key respects. For example, they
reported having paid lower fees on average for the first $100,000
of a bond than the firms not owned by women and
were more likely to be asked to provide more types of financial or
other documentation to obtain a bond.
--------------------
\1 The results described in this section generalize to an estimated
84,491 firms.
\2 There are three types of surety bonds--bid, performance, and
payment. A bid bond ensures that a firm is technically qualified to
perform the work, will enter into a contract if its bid is accepted,
and will obtain whatever additional bonds are required. A
performance bond guarantees that the project will be completed in
accordance with the contract's terms and conditions, at the
agreed-upon price, and within the prescribed time. The payment bond
ensures that individuals and firms providing labor and/or materials
to the project will be paid.
HOW FIRMS OBTAINED BONDS
---------------------------------------------------------- Chapter 3:1
Construction firms have several avenues for obtaining surety bonds.
Firms can choose a bonding agent who specializes in surety bonds or
an insurance agent who provides a range of insurance products--any
agent licensed to provide insurance is legally permitted to handle
surety bonds as well. Firms may also go directly to a surety company
to obtain a bond. The bonding specialist is seen as knowledgeable of
the requirements of the surety companies and can advise the firm on
preparing its request for a bond.
Federal, state, and local programs also assist firms in obtaining
bonds. SBA, for example, provides guarantees to surety companies to
cover a portion of the loss on a bond if a construction company
defaults. Massachusetts, Ohio, Maryland, and New York, among others,
provide guarantees, collateral, or other forms of financial
assistance to help small firms obtain bonds.
USE OF SPECIALIZED AGENT
-------------------------------------------------------- Chapter 3:1.1
Most of the small firms that had obtained bonds between 1990 and 1993
used specialized bonding agents. Specifically,
71.4 percent of the firms used agents who specialized in surety
bonds,
3.2 percent dealt directly with surety companies, and
the remaining 25.5 percent were almost evenly split in either not
being sure whether their agent specialized in surety bonds or
saying that their agent was not a bonding specialist.
The larger firms were more likely to use a specialized agent than the
smallest firms, as shown in figure 3.1.
Figure 3.1: Use of Specialized
Bonding Agent, by Size of Firm
(See figure in printed
edition.)
Source: Table 3.3a, GAO/RCED-95-173S.
The smallest firms were also less likely to say that their bonding
agent explained bonding requirements to a "great" or "very great"
extent the first time they asked for a bond. Our survey indicated
that 59.4 percent of the larger firms seeking their first bond said
that the bonding agent had explained the requirements to them to a
great or very great extent, compared with 38.6 percent of the
smallest firms.
USE OF GOVERNMENT ASSISTANCE
-------------------------------------------------------- Chapter 3:1.2
The use of government assistance programs is not widespread. Only
9.8 percent of the firms had used some form of government assistance
to obtain their bonds between 1990 and 1993. Those firms that had
obtained their first bond since 1985 were more likely to have used
bonding assistance than those that had obtained their first bond
before 1985, as shown in figure 3.2.
Figure 3.2: Use of Government
Assistance, by Year in Which
Firm Obtained Its First Bond
(See figure in printed
edition.)
Source: Table 3.6, GAO/RCED-95-173S.
The smallest firms were more likely to have used government
assistance. Specifically,
14.6 percent of the smallest firms used some form of government
assistance to obtain a bond,
9.0 percent of the medium-size firms used such assistance, and
3.7 percent of the larger firms used such assistance.
The firms that used government assistance were also more likely to
be smaller in size;
have obtained smaller bonds;
have paid for bid bonds, which are often provided at no charge;
have obtained their first bond since 1985;
have been denied a bond in the past;
report that they had lost an opportunity to bid on a project in
1993 because their bond request was not processed in time;
report that they were required to hire a financial management firm,
consulting firm, or certified public accountant (CPA) selected
by the surety company; and
report that they were required to enter into an arrangement that
gives the surety company the right to manage the job for which
the bond was provided even when the firm is not in default.
LENGTH OF TIME TAKEN TO
OBTAIN A BOND
-------------------------------------------------------- Chapter 3:1.3
Firms may lose an opportunity to bid because a bond request is not
processed in time. However, most firms seeking their first bond
between 1990 and 1993 obtained their bond within 30 days. That is
about half--52.3 percent--of the firms had their first bond request
approved in 10 days or less;
28.4 percent of the firms had their first bond request approved in
11 to 30 days; and
only 19.3 percent of the firms waited over 30 days to obtain their
first bond.
About one in five firms said they had lost an opportunity to bid in
1993 because their bond request was not processed in time. As shown
in figure 3.3, the smallest and medium-size firms were more likely to
report having lost an opportunity to bid in 1993 because of the time
it took to process a bond request.
Figure 3.3: Firms That Lost an
Opportunity to Bid Because of
Processing Times, 1993
(See figure in printed
edition.)
Source: Table 3.10a, GAO/RCED-95-173S.
Similarly, the minority-owned firms were more likely to report losing
an opportunity to bid because their bond request was not processed in
time--43.8 percent, compared with 17.8 percent in the case of the
firms not owned by minorities. We did not detect any significant
differences on this issue between the women-owned firms and the firms
not owned by women.
CONDITIONS FIRMS MET TO OBTAIN
BONDS
---------------------------------------------------------- Chapter 3:2
As a condition for approving a bond, a surety company can require
that the contractor periodically provide reports on the status of the
job, financial statements, and other documents to keep the surety
company apprised of the firm's performance and financial condition,
as well as the status of the project. In certain instances, the
surety company may require additional assurances that reduce its
risk, such as collateral to cover potential losses.
REQUIRED DOCUMENTATION
-------------------------------------------------------- Chapter 3:2.1
The vast majority of small firms reported that they were required to
provide certain types of documentation to the surety company. In
summary,
86.5 percent of the firms provided reports of work on hand or job
status,
86.6 percent of the firms provided personal financial statements,
81.2 percent of the firms provided financial statements compiled by
the firm, and
77.8 percent of the firms provided financial statements reviewed by
a CPA.
Many firms reported that they were required to provide these
documents more often than once a year. For example,
67.6 percent of the firms required to provide periodic reports of
work on hand had to provide such reports more often than once a
year,
46.6 percent of those providing periodic statements compiled by the
firm had to do so more than once a year, and
23.9 percent of those required to provide periodic financial
statements reviewed by a CPA had to provide them two or more
times a year.
The medium-size and larger firms were more likely to be asked for
almost all types of documentation. The exception was personal tax
returns: The smallest and medium-size firms were more likely to be
required to provide these.
However, among the firms required to provide certain documents
periodically, the smallest firms had to provide several types more
frequently than the larger firms did. These documents included
personal financial statements, letters of credit, personal and
corporate tax returns, and audits by CPAs. On the other hand, the
larger firms had to provide reports of work on hand and financial
statements compiled by the firm more often in a year than the
smallest and medium-size firms did.
The minority-owned firms reported that they were more likely to be
asked for personal tax returns. In addition, the minority-owned
firms had to provide several types of documents more often in a year
than the firms not owned by minorities. These included personal
financial statements and financial statements compiled by the firm,
CPA reviews, CPA audits of financial statements, letters of credit,
and personal tax returns.
As shown in Figure 3.4, the women-owned firms reported that they were
more likely to be required to provide more types of documents in
order to obtain a bond.
Figure 3.4: Documents That
Women-Owned Firms and Firms Not
Owned by Women Were Required to
Provide
(See figure in printed
edition.)
Source: Table 3.12c, GAO/RCED-95-173S.
COLLATERAL REQUIREMENTS
-------------------------------------------------------- Chapter 3:2.2
Surety companies can require firms to provide collateral as a
condition for approving a bond. According to surety officials, some
surety companies commonly require collateral, while others do not.
Officials of some surety companies view collateral as a tool that
produces a strong commitment from the firm to successfully complete
the project. The collateral is normally a liquid asset that
frequently comes from the contractor's personal assets rather than
from the firm's assets, so as not to reduce the firm's working
capital.
About a quarter of the small construction firms that had obtained
bonds between 1990 and 1993 reported that they were required to
provide collateral to obtain the bond. The size of the firm affected
this requirement, as shown in figure 3.5. About one in three of the
smallest firms but only about one in six of the larger firms was
required to provide collateral.
Figure 3.5: Firms Required to
Provide Collateral, by Size of
Firm
(See figure in printed
edition.)
Source: Table 3.14a, GAO/RCED-95-173S.
The ethnicity of the firms' owners also affected this requirement.
The minority-owned firms reported that they were more likely to be
required to provide collateral than the other firms: 36.8 percent of
minority-owned firms had to do so, while only 24.7 percent of the
firms not owned by minorities did.
OTHER CONDITIONS
-------------------------------------------------------- Chapter 3:2.3
Surety companies may impose other conditions on firms that request
bonds. About a quarter of the firms reported that they were required
to meet at least one of the following conditions:
purchase insurance from the bonding agent;
establish an escrow account controlled by the surety company;
hire a CPA or a management or consulting firm selected by the
surety company to manage the contract; or
enter into an arrangement that allows the surety company to manage
the job even when the firm is not in default.
Except for the purchase of insurance, these conditions take some
management and control of the job away from the construction firm.
As shown in figure 3.6, the firms reported that they were more likely
to be required to purchase insurance from the bonding agent than to
meet other conditions.
Figure 3.6: Other Conditions
That Firms Had to Meet, 1990-93
(See figure in printed
edition.)
Source: Table 3.15a, GAO/RCED-95-173S.
The smaller the firm, the more likely that it was subject to at least
one of these conditions shown in figure 3.7.
Figure 3.7: Percentage of
Firms That Had to Meet at Least
One Other Condition, by Size of
Firm
(See figure in printed
edition.)
Source: Table 3.15a, GAO/RCED-95-173S.
In addition, the minority-owned firms reported more often than the
firms not owned by minorities that they had to (1) establish an
escrow account controlled by the surety company, (2) hire a CPA or a
management or consulting firm selected by the surety company to
manage the contract, and (3) enter into an arrangement that allows
the surety company to manage the job even when the firm is not in
default.
DENIALS OF BONDS
---------------------------------------------------------- Chapter 3:3
Twenty-one percent of the firms that had obtained bonds between 1990
and 1993 were also denied a bond at least once during that period.
As shown in figure 3.8, the minority-owned firms were more likely to
have been denied a bond than the firms not owned by minorities.
Figure 3.8: Minority-Owned
Firms and Firms Not Owned by
Minorities Denied a Bond Since
1990
(See figure in printed
edition.)
Source: Table 3.16b, GAO/RCED-95-173S.
According to the firms that had been denied bonds, the agent most
commonly cited the firms' financial condition or lack of construction
experience as the reason for denying a bond, as shown in figure 3.9.
The smallest firms were more likely than the other firms to identify
"don't do enough bonded work" and "firm not in business long enough"
as the reasons for denying the firm a bond.
Figure 3.9: Reasons Firms
Cited as Agent's Explanation
for Most Recent Bond Denial
Since 1990
(See figure in printed
edition.)
Note: Respondents could cite more than one reason. Other reasons
were each cited by fewer than 10 percent of the firms.
Source: Table 3.17a, GAO/RCED-95-173S.
The minority-owned firms, like the firms not owned by minorities,
most commonly reported being told that their financial status or lack
of specific construction experience was the reason a bond was denied.
Other reasons were cited by fewer than 10 percent of the firms not
owned by minorities but were more likely to be cited by the
minority-owned firms. These firms were more likely to report being
told that they needed to complete current work or that a bond was
being denied because they could not obtain a government guarantee.
The minority-owned firms were also more likely to say that the
reasons given to them were not clear or understandable.
The women-owned firms also commonly reported being told that their
financial status or lack of specific construction experience was the
reason a bond was denied. However, the women-owned firms were more
likely to report that they were told the bond had been denied because
the firms "chose not to make changes in business practices or meet
other conditions required by the surety."
Most of the firms--85.2 percent--reported being told the reasons a
bond was denied orally, while the remaining 14.8 percent said they
were provided with at least one reason in writing. Both the
minority- and women-owned firms more frequently reported being given
at least one reason for their most recent denial in writing.
About two thirds--62.7 percent--of the firms were denied bonds within
10 days of applying. However, these denials took longer for the
women-owned and minority-owned firms than for other firms, as figure
3.10 illustrates.
Figure 3.10: Length of Time It
Took for Most Recent Bond
Request to Be Denied, by
Ownership of Firm
(See figure in printed
edition.)
Source: Tables 3.19b and 3.19c, GAO/RCED-95-173S.
PERCEPTIONS OF CHANGES IN
BONDING REQUIREMENTS
-------------------------------------------------------- Chapter 3:3.1
Surety company officials told us that bonding requirements had
tightened significantly in the late 1980s as a consequence of large
losses during that period. However, they said that the situation in
the 1990s is different, resulting in a relaxation of requirements for
obtaining a bond.
Nevertheless, most of the small firms perceived that the surety
companies' requirements had tightened or stayed the same over the
past 5 years.\3 In summary,
43.5 percent of firms perceived that the surety companies had
tightened the requirements for obtaining a bond,
42.9 percent perceived that the surety companies' requirements had
remained the same, and
13.6 percent thought that the surety companies had relaxed their
requirements.
The firms' perceptions of changes in bonding requirements differed
depending on the size of the firm. The larger firms were more likely
than the other firms to say the requirements had been relaxed.
As shown in figure 3.11, the firms most frequently said that the
surety agent told them that economic conditions, new government
regulations, changes in the surety company's policy, or a decline in
the firm's financial strength had caused the tighter requirements.
Figure 3.11: Reasons Firms
Cited as Agent's Explanation
for Tightening of Bonding
Requirements
(See figure in printed
edition.)
Note: Respondents could cite more than one reason. Other reasons
were each cited by fewer than 10 percent of the firms.
Source: Table 3.22a, GAO/RCED-95-173S.
The minority-owned firms more frequently viewed the requirements as
having been tightened. As shown in figure 3.12, these firms were
more likely than the firms not owned by minorities to cite their
declining financial strength as the explanation the agent gave them
for this tightening. In contrast, these firms were less likely than
the firms not owned by minorities to cite general economic conditions
and government regulations as the agent's explanation.
Both the minority- and women-owned firms were more likely than the
other firms to say that the reasons the agent gave them that
requirements had been tightened were not clear.
Figure 3.12: Reasons
Minority-Owned Firms and Firms
Not Owned by Minorities Cited
as Agent's Explanation for
Tightening of Bonding
Requirements
(See figure in printed
edition.)
Source: Table 3.22b, GAO/RCED-95-173S.
--------------------
\3 Our survey data were collected from February through July 1994.
FEES PAID FOR SURETY BONDS
---------------------------------------------------------- Chapter 3:4
Construction firms sometimes pay two fees, one for a bid bond, which
prequalifies the firm to obtain a performance and payment bond, and
the other for the payment and performance bond.
FEES PAID FOR BID BONDS
-------------------------------------------------------- Chapter 3:4.1
About half of construction firms paid a fee just for the opportunity
to bid on a job that required a bond in 1993, while the remainder
paid nothing for bid bonds. The smallest and middle-size firms were
more likely to pay a fee for bid bonds than the larger firms, as
shown in figure 3.13.
Figure 3.13: Percentage of
Firms That Paid for Bid Bonds
in 1993, by Size of Firm
(See figure in printed
edition.)
Source: Table 3.23a, GAO/RCED-95-173S.
The firms that paid for bid bonds during 1993 reported one or more of
three payment arrangements: (1) a flat fee for each bid bond, (2) an
annual service fee that covered all bid bonds for the year, and (3) a
percentage of the contract amount. In summary, our survey showed the
following:
The flat fees for each bid bond were commonly $200 or less--85.5
percent of the firms paying flat fees paid $200 or less per bid
bond under this arrangement.
For those who paid an average annual service fee, 69.8 percent of
the firms paid $200 or less in 1993.
Of the firms that paid a percentage of the contract amount, about
half (50.9 percent) paid 2.5 percent or less and about half paid
more.
The larger firms paid lower percentages of the contract amount for
bid bonds. In addition, the firms doing special trade construction
were more likely to pay for bid bonds (59.1 percent) than the firms
in heavy construction (41.7 percent) or in general building
construction (44.4 percent).
FEES PAID FOR PAYMENT AND
PERFORMANCE BONDS
-------------------------------------------------------- Chapter 3:4.2
The size of the firm significantly affected the fees it paid for
payment and performance bonds in 1993. The larger firms paid lower
fees for payment and performance bonds, paying 1.60 percent, or
$1,600, for the first $100,000 of the contract amount, while the
smallest firms paid an average of 3.47 percent, or $3,470, for the
first $100,000. Thus, for a payment and performance bond of
$100,000, the smallest firms would pay about $1,870 more for the
bond.
The women-owned firms paid less, on average, than the firms not owned
by women for payment and performance bonds. The women-owned firms
paid an average rate of 2.07 percent for the first $100,000 of the
contract amount, while the firms not owned by women paid an average
of 2.45 percent of the contract amount.
The firms doing special trade construction paid higher fees, on
average (2.67 percent), than the firms doing heavy construction (2.06
percent) or the firms doing building construction (2.15 percent).
AMOUNT OF BONDED WORK
---------------------------------------------------------- Chapter 3:5
About a third of the firms' construction revenues in 1993, on
average, came from jobs from which bonds were required. A higher
percentage of the larger firms' revenues came from jobs requiring
bonds, as shown in figure 3.14.
Figure 3.14: Percentage of
Construction Revenues From Jobs
Requiring Bonds in 1993, by
Size of Firm
(See figure in printed
edition.)
Source: Table 3.27a, GAO/RCED-95-173S.
Revenues from jobs for which bonds were required also formed a higher
proportion of the total revenues of the minority-owned firms (41.5
percent) than of the firms not owned by minorities (32.2 percent).
The firms' specialization also affected the amount of revenues they
earned from jobs requiring bonds. In summary,
heavy construction contractors reported that, on average, about
half--49.5 percent--of their revenues came from jobs requiring
bonds,
general building construction contractors reported that about
two-fifths--39.8 percent--of their revenues came from jobs
requiring bonds, and
special trade contractors reported that only about a quarter--25.5
percent--of their revenues came from jobs requiring bonds.
CHANGES IN BONDING CAPACITY
---------------------------------------------------------- Chapter 3:6
Bonding capacity--the largest bond a surety company would provide a
firm and the aggregated amount of bonds that a surety company would
provide at one time--was related to the firm's size. As shown in
figure 3.15, the larger firms had, as would be expected, a larger
bonding capacity, as measured by the largest bond obtained.
Figure 3.15: Distribution of
Bonding Capacity by Size of
Firm, 1993
(See figure in printed
edition.)
Source: Table 3.29a, GAO/RCED-95-173S.
Generally, the firms that reported bonding capacity in both 1990 and
1993 doubled their capacity over that 3-year period, on average.
However, the firms varied considerably in this regard. In summary,
42.1 percent of the firms increased the aggregate amount of their
bonds, and 44.6 percent increased the amount of their largest
bond;
for 13.5 percent of the firms, the aggregate amount of their bonds
declined, and for 17.9 percent, the amount of their largest bond
decreased; and
the bonding capacity of the remaining firms did not change.
The medium-size and larger firms were more likely than the smallest
firms to have increased their bonding capacity both in terms of
aggregate amount and their largest bond. However, the proportionate
growth in bonding capacity between 1990 and 1993 did not differ
significantly for firms of different sizes.
APPROVED BONDING LINES
-------------------------------------------------------- Chapter 3:6.1
The total amount of bonds that a surety company is willing to provide
to a firm is often communicated through an approved bonding line.
About two-thirds of the firms reported that they had an approved
bonding line. While the majority of these firms (62.2 percent)
reported that they had received a bonding line at the time of their
first bond request or after completing one or more jobs requiring
bonds, 37.8 percent had received a bonding line before they needed a
bond.
The minority-owned firms were more likely to receive their first
bonding line when their first bond was approved, as shown in figure
3.16. The other firms were more likely to receive a bonding line
before they needed a bond or after completing at least one job for
which a bond was required.
Figure 3.16: Timing of Bonding
Line Approval for
Minority-Owned Firms and Firms
Not Owned by Minorities
(See figure in printed
edition.)
Source: Table 3.35a, GAO/RCED-95-173S.
LARGEST BOND OBTAINED IN
1993
-------------------------------------------------------- Chapter 3:6.2
As shown in figure 3.17, about 25 percent of the small construction
firms with recent bonding experience obtained only bonds valued under
$100,000 in 1993.
Figure 3.17: Largest Bond
Obtained in 1993
(See figure in printed
edition.)
Source: Table 3.36a, GAO/RCED-95-173S.
To revise and streamline federal procurement, the Congress passed the
Federal Acquisition Streamlining Act of 1994. One of the act's
provisions increased the minimum value of federal construction
contracts for which surety bonds are required from $25,000 to
$100,000, effective in October 1995. This new bonding threshold
could eliminate the need for bonding for a number of small
construction firms doing business with the federal government.
CHARACTERISTICS OF FIRMS THAT HAD
NOT OBTAINED BONDS
============================================================ Chapter 4
Most of the firms that had not obtained bonds reported that they were
not required to have bonds or did not bid on jobs requiring
bonding.\1 Overall, the firms that did not obtain bonds
had annual revenues averaging $391,000--77.8 percent had annual
revenues under $500,000;
had an average of 15.4 years of construction experience;
were more likely to have their primary line of business in special
trade construction; and
were more likely to perform more work as a subcontractor than
working directly for owners.
Of the firms that had never obtained bonds, 6.5 percent were owned by
minorities and 7.5 percent were owned by women. In summary, these
minority- and women-owned firms
had an average of 2 years' less construction experience than the
firms not owned by minorities or women;
were less likely to say they did not obtain bonds because they were
not required to have bonds or did not bid on jobs requiring
bonds; and
were more likely to say they did not obtain bonds because they did
not believe the firm would be able to get bonds, so they did not
ask for them.
--------------------
\1 The results described in this section generalize to an estimated
157,306 firms.
SIZE AND OWNERSHIP
---------------------------------------------------------- Chapter 4:1
The smallest firms accounted for nearly 77.8 percent of the firms
that had never obtained bonds. On the other hand, the larger firms
made up only 0.6 percent of the firms that had never obtained bonds,
as shown in figure 4.1.
Figure 4.1: Breakdown of Firms
That Had Never Obtained Bonds,
by Size
(See figure in printed
edition.)
Source: Table 4.1, GAO/RCED-95-173S.
The minority- and women-owned firms made up a small proportion of the
firms that had never obtained bonds. In summary,
6.5 percent of the firms that had never obtained bonds were owned
by minorities and
7.5 percent of the firms that had never obtained bonds were owned
by women.
CONSTRUCTION EXPERIENCE
---------------------------------------------------------- Chapter 4:2
The firms that had never obtained bonds had an average of 15.4 years
of experience. The minority- and women-owned firms had an average of
about 13 years of construction experience, while the other firms
averaged about 15 years of experience.
TYPE OF WORK
---------------------------------------------------------- Chapter 4:3
The general building and special trade contractors were more likely
to never have obtained bonds than the heavy construction contractors.
As shown in figure 4.2, the general building contractors made up
nearly 9.1 percent of the firms that had never obtained bonds, and
the special trade contractors made up 86.3 percent of such firms.
Figure 4.2: Breakdown of Firms
That Had Never Obtained Bonds,
by Specialty
(See figure in printed
edition.)
Source: Table 4.3a, GAO/RCED-95-173S.
For the firms that had never obtained bonds, we did not find any
significant difference between the minority-owned firms and the firms
not owned by minorities with regard to the type of work they
performed.
The women-owned firms that had never obtained bonds were most likely
to perform special trade construction work. Also, the women-owned
firms were more likely than the firms not owned by women to perform
heavy construction work. As shown in figure 4.3, 11.3 percent of the
women-owned firms worked primarily in this area, compared with 4.0
percent of the firms not owned by women.
Figure 4.3: Specialization of
Firms That Had Never Obtained
Bonds, by Gender of Owner
(See figure in printed
edition.)
Source: Table 4.3c, GAO/RCED-95-173S.
The firms that had never obtained bonds performed more work as
subcontractors than as general contractors working directly for
owners. That is, in 1993
55.1 percent of the firms received a greater portion of their
revenues from subcontracting work than from work done directly
for owners,
38.5 percent received a greater portion of their revenues from work
done directly for owners, and
the remaining 6.4 percent received equal portions of their revenues
from work as subcontractors and as general contractors working
directly for owners.
REASONS FOR NOT OBTAINING BONDS
---------------------------------------------------------- Chapter 4:4
The principal reason the firms gave for not obtaining bonds was that
they were not required to have bonds or did not bid on jobs requiring
bonds. As shown in figure 4.4, five other reasons were each cited by
at least 10 percent of the firms.
Figure 4.4: Reasons Firms Gave
for Not Obtaining Bonds
(See figure in printed
edition.)
Note: Respondents could cite more than one reason. Other reasons
were each cited by fewer than 10 percent of the firms.
Source: Table 4.5a, GAO/RCED-95-173S.
The firms owned by minorities and women gave some of the same reasons
for not obtaining bonds as the firms not owned by minorities and
women. However, the ethnicity or gender of the firms' owners
affected the frequency with which they cited some of these reasons.
In summary, the
minority- and women-owned firms were less likely to say that they
were not required to obtain bonds or did not bid on bonded jobs;
minority- and women-owned firms were more likely to say that they
believed their firm would not be able to get bonds, so did not
ask for them;
minority-owned firms were more likely to use cash instead of bonds
to secure construction contracts; and
women-owned firms were more likely to say that they had performed
work in partnership or in a joint venture with a firm that was
bonded.
SCOPE AND METHODOLOGY
=========================================================== Appendix I
Using the baseline information required by the Small Business Access
to Surety Bonding Survey Act of 1992 as a starting point, we
developed a questionnaire. In developing this questionnaire, we
solicited input from the American Subcontractors Association,
Association of General Contractors, National Association of Minority
Contractors, Women Construction Owners and Executives, National
Association of Surety Bond Producers, Hispanic American Construction
Industry Association, and Small Business Administration (SBA). To
pretest the questionnaire, we held over 50 meetings with construction
firms around the country. Among other things, these firms told us
that they would be unwilling to provide financial information other
than information on sales and that a request for such information
might discourage them from responding to other questions. The
financial status of a firm is a key factor in a surety company's
decision to approve a bond.
We then selected a simple random sample of 12,000 companies from the
Dun & Bradstreet list of 683,198 firms in the construction industry,
excluding general contractors primarily involved in residential
building construction, as of December 31, 1993. Firms doing
primarily residential building construction and development were
eliminated from the study because they were not as likely as other
firms to be asked to obtain bonds. Excluding this large group
(249,178 firms) enabled us to reduce the size of our sample, and
therefore the cost of the survey, in order to obtain reliable
estimates for firms with bonding experience.
We sent the final questionnaire to each firm in the sample. We
alerted recipients by postcard before sending out the questionnaire
and mailed up to two follow-up questionnaires to firms that did not
respond to our initial request. We conducted the survey from
February to July 1994, with follow-up mailings in March and April
1994. Of the firms in our sample, 16.9 percent did not respond to
the questionnaire because they were out of business or not doing
construction work, or we were unable to obtain a current address for
them. Of the remaining 9,964 firms, 50.2 percent responded to the
questionnaire.
To determine if the nonrespondents differed from the respondents in
their experiences with bonds, we randomly sampled 800 firms that had
not responded by May 13, 1994, to contact by telephone. We excluded
from the sample those firms that were out of business or not doing
construction work. We made up to four attempts to reach each firm by
telephone. From this effort, we identified another large percentage
of firms--29.5 percent--that were out of business or for whom we were
unable to locate a valid telephone number. Of the remaining 564
firms, 52.0 percent responded to the telephone survey. Only 38.2
percent of these respondents had obtained a bond or had an approved
bonding line. We used the results from our telephone survey to
increase the accuracy of our estimate of the number of small firms
that had obtained bonds.
Because our questionnaire did not ask for confidential financial
information, we acquired whatever financial data were available on
the sampled firms from Dun & Bradstreet's Research and Regulatory
File. This information included historical sales data for all of the
sampled firms and financial statements for 3,017 of the firms. We
matched the firms' financial records to data from the survey. The
survey respondents with bonding experience were more likely than the
firms in other response categories to have financial statements on
file at Dun & Bradstreet. Financial information was available for
only 36.6 percent of the firms with bonding experience.
DEFINITIONS
--------------------------------------------------------- Appendix I:1
We determined the ethnicity and gender of the owners of the firms
using their answers to the following two questions on our
questionnaire:
"Is 51% or more of the firm owned by one or more of the following
minority groups: Black or African American, Hispanic, Asian,
American Indian or Native American, or Pacific Islander?"
"Is 51% or more of the firm owned by women?"
We determined the size of the firms by calculating their average
annual construction revenues for 3 years before the date of the
survey. When revenues for 3 years were not available, we used
average revenues for 2 years or the firms' revenues for the most
recent year. For those firms that did not answer our question about
revenues, we used Dun & Bradstreet's historical sales data to
calculate similar averages. We determined that these data were
reliable indicators of responses to our questions on revenues. We
then grouped firms into the following categories:
the smallest firms--those with average annual revenues less than or
equal to $500,000;
medium-size firms--those with average annual revenues over $500,000
and up to $3.5 million;
the larger firms--those with average annual revenues over $3.5
million, up to the maximum allowed for eligibility in SBA's
programs as a small business; and
the largest firms--those with average revenues that exceed SBA's
size standards for small businesses. We excluded these firms
from our analysis since they did not meet the eligibility
requirements for SBA's programs. (Less than 2 percent of the
firms fell into this category.)
We defined firms with "bonding experience" as those that had one or
more of the experiences mentioned in the following question: "Has
your firm ever provided a bid bond, a performance or payment bond or
had a pre-approved bonding line?"
INDUSTRY'S VIEWS
--------------------------------------------------------- Appendix I:2
We met with representatives of industry and surety associations,
surety companies, and public agencies to understand how the
construction and surety industries operate. These groups included
AMWEST Surety Insurance Company, the American Subcontractors
Association, the Fidelity and Deposit Company of Maryland, the
Hispanic American Construction Industry Association, the Latin
American Management Association, the Maryland Small Business
Development Financing Authority, the Minority Business Development
Agency, the National Association of Minority Contractors, the
National Association of Surety Bond Producers, the New York Surety
Company, the Surety Association of America, the American Surety
Association, United States Fidelity and Guaranty, Universal Bonding
Insurance Company, the Women Construction Owners and Executives, and
the Small Business Administration (SBA).
LIMITATIONS OF THE SURVEY DATA
--------------------------------------------------------- Appendix I:3
Our results generalize to at most 276,866 (+/- 6,001) small
construction firms that would have answered our survey had we mailed
our questionnaire to all companies. This number represents about
half of the firms currently in business, primarily in construction,
and identified as such by Dun & Bradstreet. Our results do not
generalize to firms that would not have responded to our survey,
which are more likely to be smaller and to work in special trades and
which are less likely to have financial statements on record with Dun
& Bradstreet than the responding firms. According to our telephone
survey, they are also less likely to have had bonding experience.
Our results also do not generalize to firms that have gone out of
business; the newest/youngest firms, which have not been in business
long enough to be identified by Dun & Bradstreet; or general
contractors for and builder/developers of single-family residences,
which we excluded from our review. Our results also do not
generalize to the largest firms; that is, those with annual revenues
exceeding SBA's size standards for small businesses.
As with all sample surveys, our statistical estimates contain
sampling error--potential error that arises from not collecting data
on all firms. Statistically, sampling error is the amount by which
the results obtained from a statistical sample can be expected to
differ from the statistics we are estimating. We calculated the
amount of sampling error for each estimate at the 95-percent
confidence level. This means that if we repeatedly sampled 12,000
firms from the same Dun & Bradstreet file and performed our survey
again, 95 percent of the samples would yield results within the
ranges specified by our estimates, plus or minus the sampling errors.
In calculating the sampling errors, we did not make a correction for
sampling from a finite population. The sampling errors for
statistics other than percentages (e.g., averages) are also reported
in the following tables.
Differences between subgroups that we were interested in, such as the
minority-owned firms and the firms not owned by minorities, are
mentioned in this report only when they are statistically
significant. Statistical significance means that the differences we
observed between subgroups are larger than would be expected from
sampling error. When this occurs, some phenomenon other than chance
is likely to have caused the difference. This report does not
identify the causes of significant differences. Statistical
significance is absent when an observed difference between two
subgroups, plus or minus sampling error, yields a range that includes
zero. In this instance, sampling error alone could explain the
difference. It should be noted, however, that the absence of a
statistically significant difference does not mean that a difference
does not exist. The sample size or number of respondents to a
question may not have been sufficient to allow us to detect a
difference.
SAMPLING ERRORS
--------------------------------------------------------- Appendix I:4
Sampling errors for the estimates of percentages cited in this report
are less than 5 percent unless noted in the following tables. In
addition, no estimate is cited if the estimate is negative once the
sampling error is considered. The sampling errors for statistics
other than percentages (e.g., averages) are also reported in the
following tables in the order in which they appear in the report.
Table I.1
Estimates and Sampling Errors for
Statistics Presented in Section 1
Sampling
Description Estimate error
-------------------------------- ------------ ------------
Estimated minimum percentage of 23.4 percent 1.1 percent
firms that had obtained bonds or
had a bonding line
Estimated minimum number of 159,807 7,857
firms that had obtained bonds or
had a bonding line
------------------------------------------------------------
Table I.2
Estimates and Sampling Errors for
Statistics Presented in Section 2
Sampling
Description Estimate error
-------------------------------- ------------ ------------
Estimated number of firms that 119,560 4,645
had obtained bonds
Average annual revenues $1,569,840 $98,680
Average construction experience 20.4 years 0.7 years
Average difference in 6.1 years 1.9 years
construction experience between
firms owned by minorities and
firms not owned by minorities
Average construction experience 18.99 years 0.89 years
of smallest firms (fig. 2.2)
Average construction experience 20.07 years 0.94 years
of medium-size firms (fig. 2.2)
Average construction experience 26.16 years 2.49 years
of larger firms (fig. 2.2)
Average construction experience 14.69 years 1.73 years
of minority-owned firms (fig.
2.2)
Average construction experience 20.83 years 0.70 years
of firms not owned by minorities
(fig. 2.2)
Average construction experience 18.51 years 1.76 years
of firms owned by women (fig.
2.2)
Average construction experience 20.68 years 0.71 years
of firms not owned by women
(fig. 2.2)
------------------------------------------------------------
Table I.3
Estimates and Sampling Errors That
Exceed 5 Percent for Percentages
Presented in Section 2
Sampling
Estimate error
Description (percent) (percent)
-------------------------------- ------------ ------------
Minority-owned firms with 51.4 8.1
average annual revenues up to
$500,000
Minority-owned firms 20.5 6.5
specializing in general
building construction (fig.
2.4)
Minority-owned firms 21.9 6.7
specializing in heavy
construction (fig. 2.4)
Minority-owned firms 57.5 8.0
specializing in special trade
construction (fig. 2.4)
Minority-owned firms obtaining 58.3 8.1
their first bond before 1990
(fig. 2.5)
Minority-owned firms obtaining 41.7 8.1
their first bond in 1990-93
(fig. 2.5)
Women-owned firms obtaining 44.8 6.5
their first bond before 1985
(fig. 2.6)
Women-owned firms obtaining 55.2 6.5
their first bond since 1985
(fig. 2.6)
------------------------------------------------------------
Table I.4
Estimates and Sampling Errors That
Exceed 5 Percent for Percentages
Presented in Section 3
Sampling
Estimate error
Description (percent) (percent)
-------------------------------- ------------ ------------
Larger firms seeking first bond 59.4 15.8
in 1990-93 that said their
bonding agent had explained
requirements to them to a great
or very great extent
Smallest firms seeking first 38.6 7.3
bond in 1990-93 that said their
bonding agent had explained
requirements to them to a great
or very great extent
Firms reporting up to 10 days 52.3 5.4
for approval of first bond in
1990 or later
Minority-owned firms that lost 43.9 9.8
an opportunity to bid in 1993
because bond request was not
processed in time
Women-owned firms required to 84.2 5.5
provide CPA reviews of
financial statements (fig. 3.4)
Women-owned firms required to 71.3 6.8
provide corporate tax returns
(fig. 3.4)
Minority-owned firms required to 36.8 9.2
provide collateral
Minority-owned firms required to 9.5 5.6
hire a financial management
firm, consulting firm, or CPA
selected by surety company
Minority-owned firms required to 12.4 6.3
establish an escrow account
controlled by the surety
company
Minority-owned firms required to 7.6 5.1
enter into an arrangement that
gives surety company right to
manage job being bonded, even
when firm is not in default
Bonded minority-owned firms that 35.5 9.1
have been denied bonds at least
once since 1990 (fig. 3.8)
Firms reporting they were last 66.7 5.6
denied a bond, since 1990,
because their financial status
was not good enough (fig. 3.9)
Firms reporting they were last 29.3 5.4
denied a bond, since 1990,
because they had never done
that large a job, never worked
in that location before, or
never done that kind of work
(fig. 3.9)
Small firms reporting up to 10 62.7 6.8
days for most recent bond
denial
Minority-owned firms reporting 37.5 19.4
up to 10 days for most recent
bond denial (fig. 3.10)
Minority-owned firms reporting 45.8 19.9
11-30 days for most recent bond
denial (fig. 3.10)
Minority-owned firms reporting 16.7 14.9
more than 30 days for most
recent bond denial (fig. 3.10)
Firms not owned by minorities 66.1 7.2
reporting up to 10 days for
most recent bond denial (fig.
3.10)
Firms not owned by minorities 28.0 6.8
reporting 11-30 days for most
recent bond denial (fig. 3.10)
Women-owned firms reporting up 58.3 19.7
to 10 days for most recent bond
denial (fig. 3.10)
Women-owned firms reporting 11- 20.8 16.2
30 days for most recent bond
denial (fig. 3.10)
Women-owned firms reporting more 20.8 16.2
than 30 days for most recent
bond denial (fig. 3.10)
Firms not owned by women 64.1 7.3
reporting up to 10 days for
most recent bond denial (fig.
3.10)
Firms not owned by women 30.5 7.0
reporting 11-30 days for most
recent bond denial (fig. 3.10)
Minority-owned firms reporting 29.1 12.0
economic conditions or
government regulations as a
reason for surety company's
tightening of bonding
requirements over last 5 years
(fig. 3.12)
Minority-owned firms reporting a 58.2 13.0
decline in their firm's
financial strength as a reason
for surety company's tightening
of bonding requirements over
last 5 years (fig. 3.12)
Minority-owned firms reporting 16.4 9.8
that reasons given by agent or
broker for tightening of
bonding requirements over last
5 years were not clear (fig.
3.12)
Smallest firms paying for bid 74.5 5.9
bonds in 1993 (fig. 3.13)
Larger firms paying for bid 29.5 6.3
bonds in 1993 (fig. 3.13)
Firms paying annual service fees 69.8 7.4
of $200 or less for bid bonds
Firms paying percentage of 50.9 7.8
contract amount to bid that
paid 2.5 percent or less for
each bid bond
Firms doing heavy construction 41.7 7.2
that paid for bid bonds in 1993
Firms doing general building 44.4 6.2
construction that paid for bid
bonds in 1993
Smallest firms with largest bond 46.6 6.0
capacity under $100,000 (fig.
3.15)
Smallest firms with largest bond 40.7 5.9
capacity between $100,000 and
$499,999 (fig. 3.15)
Larger firms with largest bond 74.0 5.7
capacity of $1,000,000 or more
(fig. 3.15)
Minority-owned firms receiving 28.6 11.8
their first approved bonding
line before ever needing a bond
(fig. 3.16)
Minority-owned firms receiving 44.6 13.0
their first approved bonding
line with their first bond
approval (fig. 3.16)
Minority-owned firms receiving 26.8 11.6
their first approved bonding
line after completing at least
one bonded job (fig. 3.16)
------------------------------------------------------------
Table I.5
Estimates and Sampling Errors for
Statistics Other Than Percentages
Presented in Section 3
Sampling
Description Estimate error
-------------------------------- ------------ ------------
Estimated number of firms that 84,491 4,024
had recent experiences in
obtaining bonds
Average fee\a paid by larger 1.60 percent 0.14 percent
firms for first $100,000 of
contract amount for performance
and payment bonds
Average fee paid by smallest 3.47 percent 0.39 percent
firms for first $100,000 of
contract amount for performance
and payment bonds
Average fee paid by women-owned 2.07 percent 0.17 percent
firms for first $100,000 of
contract amount for performance
and payment bonds
Average fee paid by firms not 2.45 percent 0.14 percent
owned by women for first
$100,000 of
contract amount for performance
and payment bonds
Average fee paid by firms doing 2.67 percent 0.20 percent
special trade construction for
first $100,000 of contract
amount for performance and
payment bonds
Average fee paid by firms doing 2.06 percent 0.26 percent
heavy construction for first
$100,000 of contract amount for
performance and payment bonds
Average fee paid by firms doing 2.15 percent 0.18 percent
general building construction
(excluding residential
construction) for first $100,000
of contract amount for
performance and payment bonds
Overall average percentage of 32.8 percent 1.81 percent
firms' 1993 construction
revenues that came from jobs
requiring bonds
Average percentage of larger 48.7 percent 4.47 percent
firms' 1993 construction
revenues that came from jobs
requiring bonds (fig. 3.14)
Average percentage of medium- 32.4 percent 2.41 percent
size firms' 1993 construction
revenues that came from jobs
requiring bonds (fig. 3.14)
Average percentage of smallest 24.2 percent 3.14 percent
firms' 1993 construction
revenues that came from jobs
requiring bonds (fig. 3.14)
Average percentage of minority- 41.5 percent 7.38 percent
owned firms' 1993 construction
revenues that came from jobs
requiring bonds
Average percentage of 1993 32.2 percent 1.87 percent
construction revenues of firms
not owned by minorities that
came from jobs requiring bonds
Average percentage of 1993 49.5 percent 5.07 percent
construction revenues of firms
doing heavy construction that
came from jobs requiring bonds
Average percentage of 1993 39.8 percent 3.95 percent
construction revenues of firms
doing general building
construction that came from jobs
requiring bonds
Average percentage of 1993 25.5 percent 2.05 percent
construction revenues of firms
doing special trade construction
that came from jobs requiring
bonds
Average ratio of largest bond 1.93 0.30
capacity, 1993 to 1990
Average ratio of total program 2.05 0.62
capacity, 1993 to 1990
------------------------------------------------------------
\a These fees are set as a percentage of the contract amount.
Table I.6
Estimates and Sampling Errors That
Exceed 5 Percent for Percentages
Presented in Section 4
Sampling
Estimate error
Description (percent) (percent)
-------------------------------- ------------ ------------
Women-owned firms doing special 82.0 5.4
trade construction
Minority-owned firms that were 73.2 6.9
not asked to provide bonds
since 1990 or did not bid on
bonded jobs
Minority-owned firms that 17.8 6.0
believed they would not be able
to get bonds so did not ask for
them
Women-owned firms that were not 70.6 6.5
asked to provide bonds since
1990 or did not bid on bonded
jobs
Women-owned firms that believed 18.2 5.5
they would not be able to get
bonds so did not ask for them
------------------------------------------------------------
Table I.7
Estimates and Sampling Errors for
Statistics Other Than Percentages
Presented in Section 4
Sampling
Description Estimate error
-------------------------------- ------------ ------------
Estimated number of firms that 157,306 5,146
had not obtained bonds
Average annual revenues $391,129 $24,199
Average construction experience 15.3 years 0.4 years
Average difference in 2.0 years 1.5 years
construction experience between
firms owned by minorities and
firms not owned by minorities
Average difference in 2.3 years 1.7 years
construction experience between
firms owned by women and firms
not owned by women
Average construction experience 13.33 years 1.43 years
of firms owned by minorities
Average construction experience 15.34 years 0.48 years
of firms not owned by minorities
Average construction experience 13.09 years 1.86 years
of firms owned by women
Average construction experience 15.44 years 0.46 years
of firms not owned by women
------------------------------------------------------------
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II
RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION
Jonathan Bachman
Carolyn Boyce
Alice Feldesman
Henry Hoppler
Kandace Mendenhall
Roberto R. Pi�ero
Stanley P. Ritchick
Phyllis Turner
Jim Wells
Karen Zuckerstein