The Small Business Administration established its bond program to enable small contracting businesses to get the bonds they need in order to compete for and work on public works construction projects. The program guarantees a large percentage of the surety bond amount for bid bonds, payment bonds, performance bonds, and ancillary bonds purchased by small contractors that meet the SBA’s qualification criteria. With an SBA guarantee in place, surety companies are willing to issue bonds to small contractors that they might not otherwise approve.
Learn more about the SBA surety bond program below, and contact Contractor Surety Group today to discuss your bonding needs.
Who Needs It?
Small contractors are often challenged when it comes to landing federal, state, and municipal contracts. These typically require certain surety bonds as a prerequisite for bidding or working on public works projects. Because surety bonds, unlike insurance, don’t relieve the bonded individual or entity from bearing full financial responsibility for claims, surety companies are sometimes reluctant to issue bonds to companies that lack the financial resources and performance track record to be considered creditworthy.
Perhaps the more relevant question is “Who qualifies for the SBA Surety Bond Program?” Not every “small” contractor meets the SBA’s size criteria. There are different size standards for different types of contractors. In some industries, the size of a company is measured in terms of gross revenues. In others, it’s the number of employees that matters.
The ultimate qualification for the SBA Bond Program, however, is need. The SBA will only consider contractors who can show that their only way to obtain a surety bond is with an SBA guarantee.
The SBA offers three different surety bond guarantee programs:
- The Prior Approval program evaluates each surety bond application separately and issues a separate guarantee for each.
- The Quick Bond program does the same thing in a streamlined manner—but the maximum guarantee amount is not as high as it is under the Prior Approval program.
- The Preferred Surety Bond program allows certain surety companies to issue guaranteed bonds without prior SBA approval.
How Does It Work?
When a claim is filed against a contractor’s surety bond and is found to be valid, the surety company will pay it initially, up to the full penal amount of the bond. Note that this payment is only as a courtesy to the claimant and as an advance to the contractor. The contractor is then legally obligated to reimburse the surety company.
With an SBA guarantee, the surety company knows that it will be repaid even if the contractor can’t come up with the money. The guaranteed amount is at least 80% of the total bond amount for most contractors and a much as 90% for businesses owned by socially and economically disadvantaged individuals, veterans, and certain others with preferred status.
What Does It Cost?
The premium paid for an SBA surety bond is a small percentage of the total bond amount, known as the premium. There is a maximum bond amount of $10 million for federal contracts, $400,000 for bonds issued through the SBA’s Quick Bond program, and $6.5 million for all others. The premium rate typically is between 1-3% of the guaranteed amount. On top of the premium, there may also be a fee paid to the SBA, which is calculated as 0.729% of the total contract value.
Get In Touch
If you believe you meet the criteria for the SBA Surety Bond program, give us a call. The construction surety experts at Contractor Surety Group will be happy to discuss your bonding needs with you.