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Thursday, January 10, 2013

SBA Surety Bond Guarantee Program

Robert Jay Dilger
Senior Specialist in American National Government

The Small Business Administration’s (SBA’s) Surety Bond Guarantee Program is designed to increase small businesses’ access to federal, state, and local government contracting, as well as private-sector contracts, by guaranteeing bid, performance, and payment bonds for individual contracts of $2 million or less for small businesses that cannot obtain surety bonds through regular commercial channels. The SBA’s guarantee ranges from 70% to 90% of the surety’s loss if a default occurs. In FY2012, the SBA guaranteed 9,503 bid and final surety bonds with a total contract value of about $3.9 billion.

A surety bond is a three-party instrument between a surety (who agrees to be responsible for the debt or obligation of another), a contractor, and a project owner. The agreement binds the contractor to comply with the contract’s terms and conditions. If the contractor is unable to successfully perform the contract, the surety assumes the contractor’s responsibilities and ensures that the project is completed. Surety bonds are viewed as a means to encourage project owners to contract with small businesses that may not have the credit history or prior experience of larger businesses and are considered to be at greater risk of failing to comply with the contract’s terms and conditions.

During the 112
th Congress, several bills were introduced to increase the program’s bond limit. For example, S. 1334, the Expanding Opportunities for Main Street Act of 2011, and its companion bill in the House, H.R. 2424, would have increased the program’s bond limit to $5 million, and up to $10 million if a federal contracting officer certifies that such a guarantee is necessary. On December 12, 2012, the Senate Committee on Appropriations released its draft of the Hurricane Sandy Emergency Assistance Supplemental bill. It includes a provision to increase the program’s bond limit to $5 million. Also, H.R. 4310, the National Defense Authorization Act for Fiscal Year 2013, which was passed by Congress on December 21, 2012, and has been sent to the President, would increase the program’s bond limit to $6.5 million, and up to $10 million if a federal contracting officer certifies that such a guarantee is necessary.

Advocates of raising the program’s bond limit argue that doing so would increase contracting opportunities for small businesses and bring the limit more in line with limits of other small business programs, such as the 8(a) Minority Small Business and Capital Ownership Development Program and the Historically Underutilized Business Zone (HUBZone) Program. Opponents argue that raising the limit could lead to higher amounts being guaranteed by the SBA and, as a result, an increase in the risk of program losses.

This report examines the program’s origin and development, including the decision to supplement the original Prior Approval Program with the Preferred Surety Bond Guarantee Program that provides a lower guarantee rate (70%) than the Prior Approval Program (80% or 90%) in exchange for allowing preferred sureties to issue SBA-guaranteed surety bonds without the SBA’s prior approval. It also examines the program’s eligibility standards and requirements, provides performance statistics, and concludes with a discussion of proposals to increase the program’s $2 million bond limit and to merge the Prior Approval Program and the Preferred Surety Bond Guarantee Program while retaining the Preferred Program’s more flexible operating requirements.

Date of Report: December 27, 2012
Number of Pages: 31
Order Number: R42037
Price: $29.95

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