Federal construction contracts above certain values require bid, performance and payment bonds, and some service and supply contracts require bonds as well. For a young or growing firm, getting bonded can be the obstacle that keeps it out of competitions it is otherwise ready to win. The SBA’s Surety Bond Guarantee Program exists to narrow that gap. With summer construction season and fourth-quarter awards ahead, here are answers to common questions.
What does the program do?
The SBA does not issue bonds itself. Instead, it guarantees a portion of the losses a participating surety company might incur if a small business it has bonded fails to perform. That guarantee reduces the surety’s risk, which makes the surety more willing to bond firms that might not meet its standard underwriting criteria, such as newer companies or those with a limited financial history.
Which bonds and contracts are covered?
The program can guarantee bid bonds, payment bonds and performance bonds, as well as certain ancillary bonds connected to a covered contract. It applies to federal, state, local and private contracts, not only federal work, and it can cover both construction and non-construction contracts that require bonds.
Who is eligible?
In general terms, the business must be small under SBA size standards, it must meet the surety’s own requirements for credit, capacity and character, and the contract must fall within the program’s dollar limits. The SBA sets those limits and the percentage of loss it guarantees, and both have changed over time. Check current figures on sba.gov rather than relying on numbers you may have seen elsewhere.
How does a firm apply?
Through a surety bond agent or a participating surety, not directly through the SBA, which publishes lists of participating sureties and agents. The program has operated through more than one track, including one in which the surety obtains the SBA’s approval before issuing a guaranteed bond and another in which approved sureties may issue guaranteed bonds without prior approval. There has also been a streamlined application for smaller contracts. Your agent can explain which path fits your situation.
Expect to provide the kinds of information any surety would want: financial statements, a list of work in progress, details of completed projects, information about your key people and the specifics of the contract you are pursuing. The SBA charges fees for the guarantee, and the surety charges its premium, so build both into your planning.
How should a firm prepare?
- Organize clean, current financial statements, ideally prepared or reviewed by an accountant familiar with construction or contracting.
- Keep a work-in-progress schedule that shows each job’s contract value, costs to date, billings and estimated completion.
- Build a relationship with a bond agent before you need a bond for a specific bid, so the first conversation is not under deadline pressure.
- Start with contracts sized to your experience and grow your bonding capacity as you complete work successfully.
A guaranteed bond is still a bond. If the contractor defaults, the surety performs or pays and then seeks recovery from the contractor and any indemnitors. Read the indemnity agreement carefully, and talk with a lawyer or financial advisor about what personal guarantees mean for you and your business. SBA district offices and Small Business Development Centers can explain the program and help you get organized.