The Surety Bond
Guarantee (SBG) Program provides small and minority contractors with contracting
opportunities for which they could not otherwise compete. By law, prime contractors
to the federal government must post surety bonds on federal construction projects
valued at $100,000 or more. Many state, county, municipal and private sector contracts
also require bonding, but small and minority businesses may not be able to obtain
bonds through regular commercial channels. Through this program, the U.S. Small
Business Administration (SBA) can guarantee bid, performance and payment bonds
for contracts up to $1.25 million for eligible small contractors.
A surety bond is a
three-way agreement between the surety company, the contractor and the project.
It binds the contractor to comply with the terms of a contract. If the
contractor is unable to do so, the surety assumes the responsibility and
ensures that the project is completed. The SBA guarantees surety companies
against a percentage of losses sustained as a result of a contractor's default
on a guaranteed bid, payment or performance bond.
There are four major types of surety bonds:
1.
Bid
- guarantees the bidder will enter into a contract and furnish the required
payment and performance bonds.
2.
Payment
- guarantees payment from the contractor to parties who furnish labor, materials,
equipment and supplies.
3.
Performance
- guarantees the contractor will fulfill the contract in accordance with its
terms.
4.
Ancillary
- bonds which are incidental and essential to the performance of the contract.
The SBG Program
consists of the Prior Approval Program and the Preferred Surety Bond Program.
Under the Prior Approval Program, the guarantee may range from 80 to 90 percent
of the losses sustained under a guaranteed bond, and the surety must obtain SBA
approval for each bond. Under the Preferred Surety Bond Program, selected
sureties receive a 70 percent bond guarantee and are authorized to issue,
service and monitor bonds without the SBA's approval.
Eligibility
Contractors - In addition to meeting the surety's bonding
qualifications, a contractor must meet the SBA's size eligibility standards for
a small business. Businesses in the construction and service industries can
qualify if their average annual receipts for the last three years, including
those of any affiliates, do not exceed $5 million. Your SBA district office can
answer any questions regarding eligibility.
Bonds - The SBA can guarantee bonds for contracts up to $1.25
million. A contract bond (bid, performance or payment) is generally eligible
for an SBA guarantee if the bond is listed in the Contract Bonds section of the
Surety Association of America's "Manual of Rules, Procedures and
Classifications"; required by the contract or invitation to bid and
executed by a surety company that is acceptable to the U.S. Treasury (Circular
57) and qualified by the SBA.
Submitting an Application
The contractor chooses
a participating surety company and applies for a specific bond through a
bonding agent who represents that surety. The application provides the
background, credit and financial information required by the surety company and
the SBA. Contact your SBA district office for a list of local surety agents who
can provide the forms required by the SBA. Once the surety company receives its
completed forms and sufficient underwriting information from the applicant, it
processes and underwrites the application and decides whether to:
·
execute
the bond without the SBA's guarantee,
·
execute
it only with the SBA's guarantee, or
·
decline
the bond even with the SBA's guarantee.
If surety in the
Prior Approval Program determines that the SBA must guarantee the bond, it
submits an underwriting review, guarantee agreement, supporting documents, and
the contractor's application forms to the SBA. If the application is for a
final bond, the contractor's guarantee fee check is also attached. A surety in
the Preferred Surety Bond Program may issue the bond without the SBA's
approval. The surety must then report the bond to the SBA and forward the
contractor's fee payment within the required time.
Application Review
In the Prior Approval
Program, the SBA reviews the information, documentation and underwriting
rationale of the surety company to determine if the application is eligible for
the program. If it is, and the information submitted by the surety company
appears favorable, the SBA guarantees the bond (the SBA may also request
additional information).
Fees
The SBA charges fees
to both the contractor and the surety company; rates are published periodically
in the Federal Register. The SBA does not charge the contractor a fee for an
application or a bid-bond guarantee. When the bond is issued, the contractor
pays the surety company's bond premium. This charge cannot exceed the level
approved by the state in which the bond is issued.
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