Many contractors understand the value offered by surety bonds that ensure a project will be completed in the event of contractor default. However, it can be difficult for smaller contracting companies to receive these contract bonds through commercial channels.
That can prevent these smaller companies from getting contracts because owners are unlikely to work with a contractor who lacks the backing of a surety bond. In the case of federal construction contracts of $150,000 or more, a surety bond is necessary for the contractor to be eligible for the contract. Most state and local governments, as well as private entities, have similar bonding requirements.
There are several different types of surety bonds that construction companies can receive, including bid bonds, payment bonds, performance bonds and ancillary bonds. Each of these guarantees some part of the construction and bidding process against the insolvency of the contractor, and all of them are difficult for smaller companies to obtain.
The government increases availability
Because the requirement of a surety bond for certain construction contracts would create an unfair advantage for larger construction companies that could easily receive a bond, the Small Business Administration has created the Surety Bond Guarantee Program, which aims to level the playing field.
Under the Guarantee Program, the SBA guarantees the bonds surety companies issue to small and mid-sized contractors. There are several regulations and limitations that ensure only qualified small companies are eligible for the guarantee program, but the SBA is able to guarantee bonds for contracts up to $6.5 million. For Federal prime contracts with a contracting officer certification, the SBA can guarantee bonds for contracts up to $10 million.
What are the rules?
To be eligible for the guarantee program, a contractor must complete a surety application through a commercial surety agent. The contracting company must be classified as small based on the size standard designations for the primary industry of the business. The company must demonstrate the requirements of a bond and that they cannot receive a surety bond without a SBA guarantee.
The size of the contract must meet the program's requirements. The company will have to satisfy credit, capacity, and character assessments as well as display its ability to complete the contract.
"Firms qualify if they can't get a surety bond without a guarantee."
The surety agent will forward the application to the SBA if they underwrite it, and note that it meets these requirements and feel they need the additional guarantees the SBA's program provides.
How much does the guarantee cover?
The SBA program does not guarantee the full value of the surety bond, but covers between 70 to 90 percent through 2 programs. The SBA will guarantee 70 percent of a bond for companies in its Preferred Program. Under this program, surety agents do not need to receive prior approval from the SBA for the bond. Under the Prior Approval Program, the SBA has to approve the surety bond guarantee ahead of time.
That guarantee can go as high as 90 percent if the company in question is minority- or veteran-owned, an 8(a) or HubZone business, a service-disabled firm and for a project that costs less than $100,000. All other small businesses will be guaranteed for 80% of the bond's value.
What is the application process?
Interested firms should locate a surety agent that has partnered with the SBA by viewing a list of agents available on the SBA website. The SBA will charge the contractor 0.729 percent of the contract price for a payment or performance bond. There is no charge for a bid bond. It is encouraged for the contractor to include this cost in bid estimates.