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Genral Information

Written by: Start Your Business

Article Overview: The U.S. Small Business Administration (SBA) can guarantee bonds for contracts up to $2 million, covering bid, performance and payment bonds for small and emerging contractors who cannot obtain surety bonds through regular commercial channels. SBA's guarantee gives sureties an incentive to provide bonding for eligible contractors, and thereby strengthens a contractor's ability to obtain bonding and greater access to contracting opportunities. A surety guarantee, an agreement between a surety and the SBA, provides that SBA will assume a predetermined percentage of loss in the event the contractor should breach the terms of the contract.

Genral Information

Genral Information

The Program

The U.S. Small Business Administration (SBA) can guarantee bonds for contracts up to $2 million, covering bid, performance and payment bonds for small and emerging contractors who cannot obtain surety bonds through regular commercial channels. SBA's guarantee gives sureties an incentive to provide bonding for eligible contractors, and thereby strengthens a contractor's ability to obtain bonding and greater access to contracting opportunities. A surety guarantee, an agreement between a surety and the SBA, provides that SBA will assume a predetermined percentage of loss in the event the contractor should breach the terms of the contract.

Definition of a Surety Bond

A surety bond is a three-party instrument between a surety, the contractor and the project owner. The agreement binds the contractor to comply with the terms and conditions of a contract. If the contractor is unable to successfully perform the contract, the surety assumes the contractor's responsibilities and ensures that the project is completed. Below are the four types of contract bonds that may be covered by an SBA guarantee:

1. Bid - Bond which guarantees that the bidder on a contract will enter into the contract and furnish the required payment and performance bonds
2. Payment - Bond which guarantees payment from the contractor of money to persons who furnish labor, materials equipment and/or supplies for use in the performance of the contract.
3. Performance - Bond which guarantees that the contractor will perform the contract in accordance with its terms.
4. Ancillary - Bonds which are incidental and essential to the performance of the contract.

Eligibility

A contractor applying for an SBA bond guarantee must qualify as a small business, in addition to meeting the surety's bonding qualifications. Businesses in the construction and service industries can meet SBA's size eligibility standards if their average annual receipts, including those of their affiliates, for the last three fiscal years do not exceed $6 million. Local SBA offices can answer questions dealing with size standard eligibility.

Types of Eligible Bonds

Bid bonds and final bonds are eligible for an SBA guarantee if they are executed in connection with an eligible contract and are of a type listed in the "Contract Bonds" section of the current Manual of Rules, Procedures and Classifications of the Surety Association of America (SAA). Ancillary bonds may also by eligible for SBA's guarantee. [ For futher information and clarification, please contact our nearest field office.]

Size of Eligible Contracts

The SBA can guarantee bonds for contracts up to $2 million.

SBA Guarantee

The SBA reimburses a participating surety (within specified limits) for the losses incurred as a result of a contractor's default on a guaranteed bid bond, payment bond, performance bond or any bond that is ancillary with such a bond. Activity is accomplished through the Prior Approval program or the Preferred Surety Bond (PSB) program

Under the Prior Approval program, the agent reviews the application package and recommends it to the surety company for approval. If the surety company agrees to issue a bond with the SBA guarantee, the package is forwarded to the appropriate SBA/SBG Area Office and evaluated by SBG personnel. If the applicant is determined to be qualified and approval is reasonable in light of the risk, SBA may issue a guarantee to the surety company. The surety then issues the bond to the contractor. SBA's guarantee agreement is with the surety company not with the small business contractor.

Any surety company certified by the U.S. Treasury to issue bonds may apply for participation in the Prior Approval program, but its bonds are subject to SBA's prior review and approval. Contractors bonded under this program are generally smaller and less experienced than contractors bonded under the Preferred Surety Bond (PSB) program. To compensate surety companies for the risk associated with bonding Prior Approval contractors, SBA guarantees 90 percent of the losses incurred on bonds up to $100,000 and on bonds to socially and economically disadvantaged contractors, and 80 percent of the losses incurred on all other bonds under this program.

The Preferred Surety Bond (PSB) program was established by P.L. 100-590 in November, 1988. The PSB program provides a 70 percent guarantee to participating sureties, but in exchange, prior SBA approval for each bond is not required. Under this program, the SBA gives selected sureties the authority to issue, monitor and service bonds without our prior approval. Each participating company has a guarantee limit with the SBA. The PSB program was created to encourage the larger surety companies to expand their efforts to help small businesses obtain bonds. Sureties participating in this program cannot participate in the Prior Approval program.

Fourteen major sureties have become participants in the PSB program. PSB surety companies serve more experienced contractors that demonstrate the potential for growth and consistently have more active work programs. PSB sureties expect the contractors to graduate from the program in approximately three years. This program is managed by SBA's Office of Surety Guarantees in Washington, DC. Current authority for the program will expire on September 30, 2003.

The following major factors guide, but do not limit, SBA's selection process of sureties to participate in the PSB program:

A PSB surety must have an underwriting limitation of at least $2,000,000, as determined by the U.S. Treasury Department Circular 570 or "T-list" of acceptable sureties.

Rates charged by a PSB surety are to be no greater then the Surety Association of America's (SAA) advisory premium rates in effect on August 1, 1987.

The premium income from contract bonds guaranteed by SBA and any other government agency shall not exceed one-quarter of its total contract bond premium income.

Underwriting authority for SBA guaranteed bonds is vested only in employees of the surety.

Final settlement authority for claims and recovery under PSB is vested only in employees of the surety's permanent claims department.

The rating or ranking assigned to the surety by a recognized authority.

The PSB surety shall execute a Preferred Surety Bond Guarantee Agreement with SBA.

Interested surety companies should send a letter formally requesting participation in the program to Robert J. Moffitt, Associate Administrator, Office of Surety Guarantees, U.S. Small Business Administration, Suite 8600, 409 Third Street, SW, Washington, D.C., 20416.

Duties of Contractor

Contractors should apply for a specific bond with an agent or surety company of their choice, providing background, credit and financial information required by the surety company and the SBA.

The contractor must complete the following forms, which are available from participating agents (a list of agents is available from your local SBA district office)

SBA Form 994: Application for Surety Bond Guarantee Assistance

SBA Form 912: Statement of Personal History (on first application and once every two calendar years thereafter)

SBA Form 994F: Schedule of Uncompleted Work on Hand (required initially and then at least quarterly)

SBA Form 1624: Certification Regarding Debarment, Suspension, Ineligibility and Voluntary Exclusion Lower Tier Covered Transactions

SBA Form 1261: Statement of Laws and Executive Orders

Duties of Surety Company

After the contractor completes the forms and furnishes the surety company with sufficient underwriting information, the surety company processes and underwrites the application in the same manner as any other contract bond application. The surety company decides whether to:

Execute the bond without the SBA's guarantee;

Execute the bond only with the SBA's guarantee; or

Decline the bond even with the SBA's guarantee.

If the surety company determines an SBA guarantee is required in order to provide the bond, it completes an SBA Form 994B: Underwriting Review and the SBA Form 990: Guarantee Agreement. If the guarantee is given under the Prior Approval program, these forms - and supporting documents - are submitted along with the Forms 994, 912, 994F, 1624 and 1261 to the appropriate SBA/SBG Area Office. If the guarantee is given under the PSB program, the forms are collected by the surety.

Duties of the SBA

Under the Prior Approval program the SBA determines an applicant's ability to complete the contract based on the information, documentation and underwriting rationale provided by the surety company. If the review establishes performance capacity, and all other aspects of the application are approved, an authorized SBA official signs a guarantee agreement and returns it to the surety company. If the review fails to establish performance capacity, the SBA seeks clarification from the surety underwriter. If performance capacity cannot be reasonably assured, the SBA rejects the application.

Cost of an SBA Guaranteed Bond

The SBA charges fees to both the contractor and the surety company, as described in the most recent edition of 13 CFR 115 :

SBA does not charge contractors an application or bid bond guarantee fee. If SBA guarantees a final bond, the contractor must pay a guarantee fee equal to a certain percentage of the contract amount. The percentage is determined by SBA and is published in notices in the Federal Register from time to time.

When the bond is issued, the small business pays the surety company's bond premium. This charge cannot exceed the level approved by the appropriate state regulatory body.

The surety company pays the SBA a guarantee fee on each guaranteed bond (other than a bid bond) in the ordinary course of business. The fee is a certain percentage of the bond premium, determined by SBA and is published in notices in the Federal Register from time to time.

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