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.
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: 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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