by Greg Angel
Due to the Federal Miller Act (1935), principal contractors are required to post surety bonds on public and municipal projects. These surety bonds guarantee performance and payment to subcontractors and material suppliers. The guarantee can often find its way onto private and commercial jobs as well, depending on the owner’s or lender’s demands.
For many small and emerging contractors, obtaining mandatory surety bonding to bid on public and municipal contracts is difficult. The required bonds are underwritten by surety companies, each of which has its own appetite for risk, underwriting criteria, and area(s) of specialty.
Certain contractor characteristics, however, consistently make receiving bond approval challenging including prior bankruptcies, existing liens, negative net income, “thin” working capital, and limited experience with a particular size or type of project.
Sometimes even if a bond is approved under these circumstances, surety companies may apply higher premiums or require other conditions, such as funds control or collateral. These “extras” add time and cost, potentially making the contractor less competitive when bidding for bonded jobs.
Leveling the Playing Field
Launched in 1958 by the Small Business Administration, the Surety Bond Guarantee Program (SBG) is intended to, “provide bonding assistance, in partnership with surety companies, to qualified small businesses.”
Under this program, the SBA guarantees a percentage of the bond (typically 80% or more) for certain surety companies which creates more opportunities for smaller contractors. The fee to the SBA is small – approximately 0.6% of the contract value – and is paid by the contractor.
The SBA Program, however, does not guarantee approval; the SBA will consider several factors in determining entry. It will also require that certain minimum standards for both the contractor and project are met. These include:
- The contract or subcontract cannot be larger than $6.5M for public and private prime contracts and all subcontracts.
- The contract or subcontract cannot be larger than $10M for federal projects.
- The contractor must meet the definition of a “small business” under federal regulation.
To apply for the SBA Program, the contractor will typically work through a surety bond agent. These professionals guide the contractor in assembling the required financial documentation and in submitting the completed bond application to the surety underwriter. Because of both the amount of detail required and the sensitive information involved, it’s important to choose an experienced and trustworthy surety bond agent.
From there, the surety underwriter will complete the necessary due diligence, with the understanding that the SBA will guarantee a portion of the bond. Once satisfied, approval is granted subject to acceptance by the SBA.
A Boost for Small Contractors
The SBA program is a valuable and effective tool for helping small contractors to capitalize on new opportunities and remain competitive in the public and municipal sectors.
The SBA’s objective in offering this program is not for contractors to remain within it indefinitely. Rather, the expectation is that the contractor will “graduate out” of the program and become bondable without the SBA’s assistance. For this reason, it’s essential that the contractor and surety bond wholesaler are a good fit so when the time comes to move on from SBA-backed bonds, the foundation has been laid for future success.
Greg Angel, CPA is a Surety executive at Massachusetts-based Surety Bond Professionals. SBP is a bond-only agency with access to over 25 different surety markets allowing for the largest programs and most competitive terms for contractors.