The Beatles said “all you need is love.” Fortunately, they didn’t do business with the DOD. If it really was just about the love, every small business in America should be gearing up for its first government contract. No one gets more public love from more political, agency, and media figures than small business. But most small business owners, while they appreciate the love, never get that first government contract.
The latest love-in for small business took place recently at a congressional hearing in Washington. The subject was, why the Defense Department did not — could not — hire more small businesses. The hearing began with all the usual love for the small business owner. Once those formalities were out of the way, industry and public officials explained that most small business owners are not actually qualified to do it. It isn’t that small businesses can’t paint a building, fix some plumbing, or erect a small structure. It is mainly because they do not have the credit.
Many are surprised when they learn it takes credit to do a government job – and a lot of it.
Here’s why: If the Defense Department has a $300,000 paint job, the bidders need at least $300,000 in cash and credit before they can be considered for the work. The contractor has to pay for all the materials and labor and bonding long before the first dollar comes in.
Banks used to supply working capital based on a government contract, but everyone knows the banking industry has problems of its own to sort out right now.
Bonding is even more difficult than the lack of working capital. A bond ensures that if a contractor does not finish the job or pay his vendors, the bonding company will. To the public official, that looks like insurance. To the contractor and the surety company, bonding is credit: If the bonding company is not satisfied that you can make good on the amount they might have to put out to finish the job, they will not issue your bond. To get a bond, most most bonding companies want to know just one thing: your credit score. Today, most small contractors just don’t have it so they do not even bid for public work because they cannot get a bond.
Normally, there is not a direct connection between capability and bondability, but it is seen as such. That mentality is killing small business’ chance of government contracts by the tens of thousands around the country.
Committee members and administration officials nibbled around the edges of a solution: Make public contracts smaller, so more people will have the credit they need to qualify. That’s a partial solution, at best. Remember, small businesses are many times reliant on the owner’s credit score – tied to ALL financial decisions made by the owner, not just business decisions.
We do not have to write off an entire generation of small contractors because their credit is less than perfect. We can put them back to work, create jobs and lower the cost of public projects.
If the Defense Department can figure out a way to deliver millions of dollars in suitcases to Afghan tribal chieftains, surely government at all levels can find better ways to manage the risk from small contractors doing government work.