The $50K Bond - City Wrong on All Accounts

I'm glad the El Paso Times did the story on how the City of El Paso raised their blank construction bond form nothing to something.  It's not a sexy story, but it has serious ramifications for both contractors and the general public - so it's a necessary story.  Click HERE for the story.

I know all of you think that all contractors are a bunch jerks who take your money and leave your project unfinished.  You're wrong.  Just like there are priests who touch children and doctors who kill Michael Jackson, there are contractors who do bad things.  However, most of them aren't bad.

Construction bonding is tricky, expensive and completely necessary - necessary to a point.  If you're not sure what bonding is, here's a quick run down.  It's basically an insurance policy on your work.  The surety (bonding company) is saying that they think you can not only perform the work, but are financially fit enough for them to take from you what they lose on your work if you don't perform.  Others will argue with my assessment, but they're wrong.  The only reason they look at your financial health is to size you up for the time when they need to get reimbursed.

The city admits that the arbitrarily raised the blanket bond.  For those of you who went to public school, arbitrary means- they woke up one morning and picked a number that sounded big and went with it.  Like any rash decision made with the best intent, this one also managed to screw everyone. 

Requiring a bond that size means that contractors have to come up with as much as $7,000 to get qualified with the city.  Remember, this "qualifies" you to pull a permit with the city.  If you don't have the money to get a blanket bond and your business is building stuff for people who live in El Paso... well, you quit and find a new line of work.  Not really.  You just start lying to people and performing work without permits.  If the city wanted to combat crappy contractors, they went the wrong direction.  They created, by the paper's account, roughly 2,100 of the contractors they were trying to rid themselves of and they did it over night.  I have to give them kudos - at least they did something quickly for once. Too bad it was fill the city with uninsured contractors.

The fact that the contractors who can pull a permit to do work in this city are now insured up to $50 big ones, hasn't gone unnoticed by the local law community.  An enterprising lawyer can run around town with his own construction inspector convincing homeowners that their contractor screwed them.  The payoff is easy - the contractor can't go to trial due to the general public opinion that all contractors are crooks (see the first sentence and remember how you first felt when you read the story in the Times... you have a bias - you know it) and most contractors/bonding companies will just pay the lawyer and his client to got away knowing that fighting over a $6,000 roofing project will cost roughly $6,000.  If a client goes after the company that bonds you (surety) for work you did... you won't get bonded ever again.

In fact, there's a lawyer in town doing just as I suggest right now.  Roofs that were inspected by the city and passed with big green check marks are coming under the scrutiny of one particular lawyer and his "inspector."  They are raking in the dough knowing that contractors will pay a couple thousand bucks rather than fighting the claims to the tune of a few thousand bucks.  It's a lose-lose situation for the contractors, it's just a matter of minimizing the loss. 

As the risk to the contractor increases, so does the price for the consumer.  Hell, as the cost of doing business goes up, so follows the price. Not all contractors are millionaires.  In fact, the vast majority of them generate around $200,00 a year in revenue and maybe pocket a quarter of that if they are lucky.  For every big rich contractor out there, there are a million little guys who are just barely scraping by.  So don't get on your high horse like we're all rich and can afford an extra $7,000 off of our bottom line.  And don't fool yourself into thinking that cost won't be passed on to you the next time you need something done at your home or business.  

The real answer here is some kind of qualification process that proves to the city that the contractor is capable. Currently they only require you acquire bonding, which is really a test of your financial health, not your abilities as a contractor.  When your roof is leaking, you don't need a guy who has a great credit score, you need a guy who is a great contractor.  The city is certifying the credit score guy.  Go figure.

Again, the problems caused here were all due to a reckless legislation that lacked thought or research.   What do you expect?  It's El Paso. 

Comments

[Ken]

Another reason the Bond Underwriters require a good credit score & strong financial is because every once in a while a contractor will underestimate the cost of the project and they have the financial means to complete the project at a loss & move on to the next one. Those contractors barely making ends meet who happen to underbid a project might be forced to walk away.They pose a greater risk to the bond underwriter. Contractor with a good credit score & stron financial can get the $50K Bond for $500. The others might pay an astronomical premium, if they can find someone at all. On a possibly unrelated matter, how come there was no apparent outrage in the El Paaso community over the hand slap sentence given to Sambrano in the Samcorp bribery conviction in San Antonio? Unless I misunderstood what ws in the paper, or they got it wong, seems all the guilty parties made off pretty well, leaving the Bond Underwriters chasing them individually for all the money that was paid out to complete their projects. Certainly there must be more to this stoy than was printed in the Times!

[native elpasoan]

Ken: Sambrano has friends in high places - and the "crime" was committed in South Texas - not El Paso. Sambrano destroyed many small contractors in El Paso because he owed them in excess of $100,000+ and they never got paid - not even by the surety. The only way to get him now is for bank fraud on the multi million dollar line of credit he drew down before he was caught.

[Lisat]

It costs $500 for the bond. Quit crying poor me.

[Carl Starr]

I agree Esquires create fear with their trade secrets, but I plugged arbitrary in Lexis and found little re bonds, thus I doubt it was arbitrary, it affects all contractors even and I am sure there was some lege debate befor enacting. I dont think arbitrary and oppressive requirements are the same thing. I did not read Times story but this story says City admitted they arbitrary raised bond?....I am not sure what "right" the city infringed....fines and fees etc are raised all the time.

[David K]

Lisa T,

It costs me $500, but it doesn't cost everyone the same amount. Big contractors like me can get a $50k bond for for $500 because we routinely ask for bonds much much larger than that. And let's not forget that our financial health is a big factor. We do everything we can to increase our bond rating and that means structuring your financials in a very specific way... a way that Joe the Plumber wouldn't ever think of trying because it makes no sense for him and it's expensive.

If you're a small guy who doesn't have a perfect credit score, a lot of equity in your house and some major savings (cash), the bonding company is going to want as much as 15% of the total bond amount. That's where the $7,000 is owed yearly to secure this bond. That's a lot for a guy who only does $150k to $200k in business a year.

Lisa, you obviously don't know much about this issue and you say you are "fighting for the little guy," but by backing this ridiculous blanket bond amount, you're saying that only big rich guys will be able to play locally. Hence the reason you have a 90% reduction in the amount of contractors who are certified (through blanket bond) to pull city permits.

You're dead wrong on this issue. We require the largest blanket bond of any city in the state of texas and it isn't by a few grand - it's double Houston's $25k requirement.

Way to shit on the little guy, Lisa. You'll make a fine city councilor - you didn't do you research and you're sticking to your guns no matter what the facts are.

[native elpasoan]

I understand the City did their usual "we checked with all the cities in Texas and Houston had the highest blanket bond at $25,000 so we decided we wanted $50,000" and that is the sole reason they picked that amount. They didn't have any stats to support raising the amount this high other than probably some (not all) residents crying about a bad contractor.

I do know that El Paso in the last couple of years has earned a reputation among surety companies (especially for the blanket bonds) for having some of the highest claims in Texas against a blanket bond. What this does is eventually shuts down the insurance market choices for El Paso businesses. I heard State Farm won't even write the bonds anymore in El Paso and that's who a lot of small contractors might have used. The City requires a Treasury rated surety for it's construction projects. That is not the same requirement for blanket construction bonds. Any insurance company can write one and there is no guarantee that insurance company has the financial capability to pay off if someone makes a bond claim against it. Bottom line - the City doesn't want the phone to ring with cry babies (citizens) complaining so their usual reaction is to somehow make up an ordinance that will stop their phones from ringing. Now that's customer service.

[living in the 12]

david is right on this one lisa. the days of letting a juan or jose the roofer fix your roof are over with this bond thing. if you let juan or jose do it you wont be able to get a permit. i would still vote for you though. i think you would learn that this is bad and you would change your mind. i saw where you(lisa) posted on the strelz blog about how much the city pays for insurance for the employees. if what you said is true about the 75 percent of the entire rate then the city is paying to much. if the city only paid the employee portion and not a percentage and made the employee pay for the spouse(significant other or whatever) and childrens portion then the domestic partner issue would be mute(in other words add who or what you want because your paying for it) and you would probably save the city a good bit of money for the budget. city employees would be pissed a little though. that means a friend of mine would have to pay probably 200 dollars a month more but so what ? its damn good insurance, better than anything i can offer my employees and cheaper. i just threw this insurance thing in because
i know you are running for office.

[Carl Starr]

Las Vegas Review-Journal (Nevada)

FINAL EDITION

The county's proposed rules would require builders to carry insurance policies and a $100,000 surety bond. Homeowners would be able to file a claim against the bond if a contractor's license is revoked.

[Mike]

So which is it, David? Are you complaining that you've (well, mom and dad, anyway) managed to build up your credit score and as a result you can get a pretty good bid bond for relatively little - while a guy with crappy credit has to try a little harder?

Isn't this quite against your ill-formed Republican philosophy? I mean, heck what about all those poor minorities and such that got home loans because of the CRA and severely damaged all the poor Goldman Sachs and Lehman Brothers of the world?

What about all those idiots who can't pay their credit card debt and still want access to cheap loans?

Do your opinions only track to whatever it is that hits you close to home?

BTW, try contracting in the federal market. $3M is the usual bond I have to secure from our surety.

[David K]

Mike,

Read the post. It answers your questions. I'm sorry you went straight to the comments section first and ended up missing the obvious.

[Lisat]

Knowing people who have been ripped of by those in your industry David may have colored my opinion. Thus I see no problem with the bond. The bond provides the customer with some comfort that the person they hired to do a job is finically sound and won't go bankrupt on them half way through something as small as a roof job.

So David does your company have suppliers?Does your company do business with people who cannot deliver on the goods?Does the company pay for the full order yet receive only a 1/3 of it? Are you ok with that?

The bond issue exists solely because your industry turned their back on their customer thus forcing the government to step in to protect your customer. Your industry failed it's own customers. So until you guys clean up your own ranks there will be issues like this.

So yea I do understand the issue from your side and the customers side.

[david k]

Lisat,

You're so full of shit. I want names and case numbers where these people turned in the people who ripped them off. I'm willing to be there are none.

If your buddies didn't know how to pick a contractor, there are multiple avenues to help them do so. It is not my financial responsibility to protect your idiot friends from themselves.