City officials have embarked on a campaign to beef up minority businesses as several large developments promise to bring millions of dollars in contracts to Baltimore during the next decade.
The city is home to a handful of multimillion-dollar, minority-owned contracting and construction businesses, such as Banks Contracting Co. and Mace Electric Co., but most are too small to handle large contracts.
"We don't have that many minority companies with the capacity to do the bigger projects," said City Councilwoman Paula Johnson Branch. "That's because over the years minorities were not sought after to work on the bigger contracts, so they weren't able to grow. They remained stagnant."
Baltimore officials are taking a two-pronged approach to changing that. One initiative is aimed at increasing the size of performance bonds for which small businesses can qualify. A second is a push for minority companies to create joint ventures that would provide them with more capital and bigger work forces.
City officials say the timing is right to expand minority-owned companies. Plans are under way to build extensive biotechnology parks on the east and west sides of towns, and the revitalization of downtown continues to bring more projects to the city.
In addition, Mayor Martin O'Malley began an aggressive campaign last year to increase minority business opportunities in the city.
"What we're going to do is make sure that this is not an impediment - the fact that they may be small or that their finances may not be that great," said Rep. Elijah E. Cummings, a Baltimore Democrat who is working to ensure minority business participation in the $800 million east-side biotech park planned near the Johns Hopkins medical complex. "We don't want that to impede them from getting involved."
City officials and business people acknowledge that bonding - insurance that provides payment if a contractor fails to complete a job as promised - doesn't guarantee that a company will win jobs or qualify for additional bonding, even with more lenient standards.
Persuading minority companies to open up their businesses and turn competitors into partners could also prove difficult, observers say.
"If there's anything we can do to get more work, that's always good," said Pless Jones, vice president of P&J; Contracting Co. and president of the Maryland Minority Contractors Association. "But we try to push for getting it on your own. Most of us are hands-on within our company, and it takes a lot of work to get into a joint venture."
To help bond minority companies, the city has signed Washington-based DevCorp Consulting Corp. to a one-year contract, with the option to extend two more years. The company specializes in creating programs for government agencies that give small, disadvantaged companies the tools to compete for contracts.
Along with bonding services, DevCorp offers working capital loans to keep businesses operating while they are waiting to get paid for jobs.
Construction companies buy surety bonds as insurance that they'll complete a job. To get a $1 million bond, a company might pay 1 percent or 2 percent of that amount - $10,000 to $20,000. Smaller companies often can't afford that, or their financial statements don't pass muster with insurance companies that provide the bonds.
"Of course, the problem at issue for the bonding company is what kind of credit risk they're exposed to," said Kenneth Stanton, an assistant finance professor at the University of Baltimore. "If you're talking about a minority business that is small, their credit backing may be quite low. They may pay higher rates or not qualify for bonding."
Bonding companies say they look at a variety of factors when approving bonds, such as how much work a company has done, how much debt a contractor has, net worth, payroll, equipment and reputation. Much emphasis is placed on financing, though.
"They're all important, but I would certainly say that capital is crucial, especially when you're talking about a small, upstarting business," said Connie Lynch, director of government relations for the National Association of Surety Bond Producers. "You really want to know that they have the financial backing to do the job. Or if they have their fingers in a lot of pies, or do they have a lot of unfinished work and therefore unrealized revenue?"
DevCorp puts more emphasis on the technical ability and track record of the company. With backing from the risk and insurance services business Marsh Inc. and other companies, DevCorp can provide surety bonds of up to $3 million. Company officials said its interest rates and fees are competitive with those of the rest of the market.
"Our job is to say, 'Look, there's a way for even small companies to get bonding,'" said DevCorp President Carlton Lewis. "It doesn't mean free and easy access to jobs, but it will definitely get you into the game."
The company said it has helped with the awarding of 500 contracts since its inception in 1992. It has set up contracting programs for the Miami-Dade Water and Sewer Department in Florida, the Waste Water Relief Program in Fort Worth, Texas, the Detroit Water and Sewerage Department, and the Regional Transportation District in Denver, among others.
Mixed results
Prince George's County hired DevCorp in the mid-1990s after its minority business office lost staff members because of budget cuts. Officials there said the program worked for some but not all. The program wasn't extended because it didn't help enough businesses, county officials said.
"We had varying degrees of success with this," said Carolyn Scriber, Prince George's director of the Office of Central Services. "We got three or four companies that got contracts with the county government, housing authority and board of education. Several became bonded."
DevCorp has pledged to Baltimore officials that it will get 30 companies bonded or set up with loans.
One Baltimore company, Phipps Construction Co., has gotten bonding from DevCorp since it opened its city offices at the Small Business Resource Center in April. Phipps was bonded for $400,000 to provide heavy equipment, such as backhoes and dump trucks, to the city.
President Randy Phipps said his company has no problem getting financing - it's bonded for $5 million - but got a lower interest rate with the DevCorp bond.
"For this particular job, it was a good deal," said Phipps, whose 28-employee company has annual revenue of $3 million.
While DevCorp is working on bonding, the city is encouraging minority companies to form partnerships that will increase their capacity to compete for bigger jobs.
"Say you have company X and company B, and both have the capacity to go after a $150,000 contract," said Owen Tonkins, head of the mayor's Office of Minority Business Development. "If they combine resources, they can go after twice that much."
Some minority companies might be reluctant to form a joint venture because they don't want to open their finances to scrutiny by another company. They also say that it's time-consuming and complicated to form partnerships, and that they worry about losing autonomy.
"Most of us don't have enough time to go into a joint venture," said Jones. "I wouldn't say it wouldn't be worth it. But it's easier to go along with what you know."
Forming partnerships
Tonkins said minority companies can keep their independence by setting up limited liability corporations, which enable companies to acquire partners from project to project.
"A lot of times when I've been talking to the smaller companies, they think they have to give up their current company," said Tonkins. "I tell them that isn't so."
Al Washington, president of AWA Mechanical Inc. in Catonsville, said he would consider a partnership but that it would have to be with a company with a similar philosophy. He also warned that small companies can't be brought together without teaching them how to manage a big project.
"It sounds good on the surface, but just because you can build doesn't mean you can manage a contract," said Washington, whose 19-employee company has about $3 million in annual revenue. "You need that project-manager experience."
The University of Baltimore's Stanton said joint ventures are a good concept, particularly if smaller companies are combined with larger, more experienced ones.
"The down side is that as soon as you take on a partner, you're splitting up the profits you get for your work, but on the up side you're reducing your credit risk just by diversifying, Stanton said. "You're creating more collateral to back the project."
Partnerships have worked in a few instances, but mostly for larger companies.
Brian D. Morris of Legacy Harrison Development said his company could have bid on its own for a city contract to build a high-rise apartment building on what is now a parking lot. He thought his chances would be better if his company and another bid together.
So, over drinks at Baltimore's Belvedere Hotel, he discussed the idea with Ronald Lipscomb, who owns Lambda Development and Doracon Contracting, a construction company. As a team, the two won a $34 million deal to build the Zenith residential tower at Paca and Pratt streets. Lipscomb's company will do the construction, and Legacy will handle most of the development.
The men said that for a partnership to work, the companies' chemistry has to be right, and the businesses should have similar missions and solid reputations.
"You need to look at integrity, resources and the ability of companies to perform," Morris said. "A joint venture has to make sense. Some of the difficulty in the past has been that people have tried to create marriages where it didn't make sense."
'Merge your talents'
Lipscomb also entered into a joint venture with 42-employee Banks Contracting to win 60 percent of the contract to renovate the old Railway Express building near Penn Station. The two companies will turn the 105,000-square-foot building into live-and-work studios. "We've been competitors in the past," said Kenneth Banks, president of Banks Contracting. "Sometimes you compete on something, but other times it's more beneficial to merge your talents."
City officials hope to get more minority businesses to adopt that philosophy.
Tonkins, whose office was established to increase opportunities for minority businesses, said he is constantly seeking contracts for which partnerships make sense. "A lot is just education," Tonkins said. "The more educated these businesses become on joint venturing, the more of it we'll see."