Unlock the Bond Box

From the Advocate

February 2024

Unlock the Bond Box

California’s Historic Infrastructure Investment Makes Case for State-Funded Bonding Fund

California is investing a once-in-a-generation $180 billion in infrastructure over the next 10 years using state, federal and local funding. Building a new system of clean energy, repairing the state’s roads, bridges and public transit and expanding high-speed internet to ultimately grow the state’s economy have been the identified priority projects. Yet this historic investment offers the potential to achieve even greater impact on future generations.

“This goes far beyond roads and bridges – this is about investing in our communities and our families, giving opportunity to hard-working Californians and ensuring we deliver on our world-leading climate goals,” Governor Newsom has said.

To track the $180 billion spend, the Administration launched Build.ca.gov, a new state website showcasing the projects benefiting from the investment. Featuring an interactive state map showing the locations of projects underway or planned, the site also puts a spotlight on the people and businesses making it all happen. But what I want to draw attention to is the Project List section: the database of open projects that companies can bid on. I encourage you all to visit this new website for more information and open projects.

Yet to truly make the $180 billion an endeavor of equity for all Californians, small businesses must be among those benefiting.

This massive infrastructure investment is a golden opportunity for real change that can help small businesses create life-changing, generational wealth through winning high-paying state contracts. Governor Newsom has been steadfast in his directive that California stays the nation’s leader for small businesses. This includes his signature on AB 2019, which mandates that 25 percent of State contracts be awarded to small businesses.

While AB2019 puts a safeguard in place for small business interests, too often, systemic obstacles prevent execution against the State’s ambitions, especially for diverse-owned businesses. One such block is bonding, most specifically, the Bid Bond.

Small contractors, who have proven their capacity to do the job, too frequently don’t have the upfront cash for the bid bond or insurance required to land the job.

While it is easy to understand why these measures are in place, they shouldn’t be a reason for small contractors to be nixed out of all lucrative government contracts.

So what is a bid-bond?

Common in the construction world, a bid bond is a type of contract bond that guarantees the project owner that the contractor they choose (usually the lowest bidder) will finish the project if awarded. Bid bonds, like other types of surety bonds, are legal agreements involving three parties: the Obligee (the project developer), the principal (the proposed contractor or bidder), and the Surety (the company issuing the bond). For example: On a $2,000,000 Contract, this is the Bid Bond Cost to the Contractor:

First $100,000 x 2.5% = $2,500

Next $400,000 x 1.5% = $6,000

Next $1,500,000 x 1.0% = $15,000

Total cash required for contractor to put in bond: $23,500

The contractor may have the capacity to do the job, but not the cash upfront to land it.

As the name of my office clearly states, we are the Advocates for small businesses. I believe we can collectively find a workable solution to the bid bond block by establishing a fund that approved small businesses can access for bonding and insurance.

Democratizing access to capital is one of the strategic keys to delivering on CalOSBA’s mission and you’ve heard me talk about it before in this column.

This bonding issue is a perfect example of why I frame it this way: the State really truly wants these outcomes of increased participation…so we need to remove obstacles that will help us, literally, build a California for All.

Supporting small contractors gain state contracts without the burden of a bid bond is not without precedent.

Several states already have financing assistance programs in place for contractors including technical and surety bonds. Other states simply removed the necessity of the bid bond for small businesses on public work projects at all or under a certain amount

I think the path of least resistance for California is a new bid bond fund that will help meet the requirements using the contract itself as collateral.

Build.gov.ca projects are ready to be filled. California’s small businesses and contractors have the know-how and motivation to fill them.

The creation of a bid bond fund will help bridge these two opportunities.

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