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SBA Surety Bond Guarantee Program: The U.S. Small Business Administration’s (SBA) Surety Bond Guarantee Program, with cooperation from the surety industry, assists small construction companies in obtaining required bonds on federal, state, local, and commercial construction projects and on service and supply contracts and subcontracts. Small and emerging contractors grow by increasing contracting opportunities, especially in public sector construction. Many surety bond companies recognize the importance of providing bonds to small, minority, and emerging contractors and have developed programs to assist them.
SBA Bond Program Overview: For more than 30 years, the Surety Bond Guarantee (SBG) program has helped small and emerging contractors who have the knowledge and skills necessary for success, but lack the combination of experience and financial strength to obtain bonds through regular commercial channels. SBA guarantees bid, performance, and payment bonds issued by surety companies to small and emerging contractors and reimburses the surety a percentage of loss if the contractor defaults. This government guarantee allows sureties to write bonds for contractors who would not otherwise meet their minimum standards—thus providing small and underserved contractors with contracting opportunities for which they would not otherwise qualify.
The SBA Office of Surety Guarantees (OSG) administers the SBG program as a partnership between the federal government and the surety industry. The SBG program consists of the Prior Approval program (Plan A) and the Preferred Surety Bond (PSB or Plan B) program.
The Prior Approval Program (Plan A): Under the Prior Approval program (Plan A), SBA must approve each bond guarantee individually, based on information submitted by the surety. SBA’s guarantee percentage is 90% if the contract is $100,000 or less or if it is awarded to a socially and economically disadvantaged, HUBZone, or veteran-owned or service-disabled-owned firm. Otherwise, SBA’s guarantee is 80%. The surety bond producer 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 for evaluation. If SBA determines that the applicant is eligible, the 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 on behalf of the small business contractor.
Preferred Surety Bond (PSB) Program: The SBA’s PSB program authorizes selected sureties to issue, service, and monitor bonds without SBA prior approval. The SBA guarantee is 70% in this program.
These select sureties must have a formal plan to graduate PSB contractors into the standard market.
To participate in the PSB program, the surety company:
- Must be on the U.S. Treasury List (Circular 570) of acceptable sureties;
- Must have an approved underwriting authority of at least $2 million;
- Cannot have premium income from contract bonds guaranteed by SBA and other government agencies exceeding one-quarter of its total contract bond premium; and
- Cannot delegate its underwriting and claims settlement authority outside of its own employees.
Eligibility: In addition to the surety’s bonding qualifications, the following SBA eligibility requirements apply:
- The contract must be $2 million or less. With the recent Obama administration passing legislation as part of the stimulus package, the amount now is $5 million, but can be as large as $10 million if its for federal projects.
- The contractor’s business must qualify as a small business under federal regulations;
- For federal contracts, a contractor must meet the small business size standard for the North American Industry Classification (NAICS) codes selected for the procurement by the contracting officer. For all other contracts, a construction or service contractor’s average annual receipts (including affiliates) for the last three fiscal years cannot exceed $6.5 million;
- The contractor must possess a good reputation and must not presently be debarred, suspended, proposed for debarment, declared ineligible, or voluntarily excluded from transactions with any federal department or agency.
The SBA guarantees bid, performance, and payment bonds including ancillary bonds incidental to the contract and essential for its performance, as well as maintenance bonds, for defective workmanship and materials, provided the term does not exceed two years. A surety company certified by the U.S. Treasury Department to issue bonds (as listed in Circular 570) may apply for participation in the SBG program.
Surety underwriting is based on evaluating a contractor’s capacity to perform and financial strength. The SBG program does, however, allow participating sureties to consider bonding contractors whose capacity or capital may not meet the company’s normal underwriting standards. This often occurs when a surety attempts to underwrite a small emerging contractor.
Sureties often encounter contractors who are just starting their own business. The contractor may not have the financial resources to purchase equipment and meet the capital requirements necessary for standard surety underwriting. The surety must continue to apply the underwriting guidelines, standards, and qualifications for a standard case, but the SBA guarantee provides additional financial strength to support the contractor’s limited capital position or experience.
In order for the contractor to qualify for the SBA program, the contractor should find a surety bond agent who is appointed to write surety bonds with a surety company that has been approved by the SBA through this program. Once this requirement has been met, the contractor can expect to provide the following information as part of the initiation process (the initation process is detailed in the SBA Checklist). Keep in mind that all documents should be signed and dated by the principal(s) and that all SBA forms will have to include original signatures.
1. Contractor Questionnaire
2. General Indemnity Agreement
3. Personal Financial Statement – signed & dated
4. Company & Affiliate Financials (if available) signed & dated: 3 full years
5. IRS statements – signed & dated:
- 1040 pages 1 & 2 (including Sch C or C-EZ if applicable) for each owner, for 3 years
- Page 1 for each Corp, Partnership, LLC (1120, 1120S or 1065) for all entities, for 3 years
6. Bank Reference Letter (or optional VVS part A – signed & dated)
7. Job Experience Verifications (surety status reports or optional VVS parts B & C) signed & dated
8. Schedule of Uncompleted Work (SBA Form or Industry Standard 5 column - optional) signed & dated
9. Resume of Principals and/or Key staff (start-ups & optional for existing companies)
10. SBA Form 912 original
11. SBA Form 994 (Parts 1, 11, IV &V) copy only
12. SBA Form 994B original
13. Personal Credit Score & Statement that “Credit is Good” or disclosure of all past due credit items including bankruptcies, judgments and liens, etc. OR the credit reports themselves (optional).
Surety Bonding Line Documents (These annual documents are completed by the surety company representatives.)
1. SBL Request Letter - original
2. SBA Form 994B - original
3. SBA Form 994 - copy