- What is a Surety Bond?A surety bond is a written agreement between a Surety Company and the Contractor, or Principal that helps protect the project owner, or Obligee, in the event the Contractor fails to successfully perform the contract. If the Contractor fails to perform, the Surety Company assists the Obligee in completing the contract.All Federal construction contracts greater than $150,000 require a surety bond as a condition of contract award. Very often, the Contractor must provide a “bid” bond in order to bid on a Federal contract. The bid bond tells the Project Owner that if the contract is awarded to the contractor, the contractor will be able to obtain a “performance” bond. So, there are generally two types of bonds, a bid bond when submitting a bid on a project, and a performance/payment, or final bond, that is required for contract award.
- How does a Small Business apply for a bond?Any business, large or small, must apply for a bond with a Surety Company or an agent that is authorized to represent the Surety Company. The business is then evaluated as part of an underwriting process that assesses such business attributes as character, capability and capacity. The purpose of underwriting is to gauge the likelihood that the contractor will successfully perform the contract.View a list of Surety Companies, or search the SBA Surety Bond Guarantee System to find Agents empowered to represent participating surety companies.
- How does the SBA Surety Bond Guarantee Program help a Small Business obtain bonding?During the underwriting process, a Surety Company or an Agent may find that the small business presents a degree of risk beyond that which the Company or Agent is willing to assume without the SBA Guarantee. For example, a small business may have limited working capital or lack evidence of prior, successful contract performance that causes concern. Under the Surety Bond Guarantee Program, SBA guarantees between 70 and 90% of the losses and expenses incurred by the Surety Company should the small business default and fail to complete the contract. This Government guarantee encourages the Surety Company to issue a bond that it would otherwise not issue to a small business.
- What is the underwriting process?The underwriting process assesses the contractor’s capability and capacity to perform the contract, as well as the contractor’s character. The purpose of underwriting is to determine whether there is a reasonable expectation that the contractor can successfully complete the contract.Among other areas addressed during the underwriting process with a Surety Company or Agent are the following:
- personal financial status of the business owners/IRS tax forms, etc.
- company financial status / balance sheet and income statement. [CPA prepared statements may be required, depending on the quality of statements prepared in-house, and the size of the prospective contract.]
- bank & credit information
- a schedule of contracts on hand and the stage of completion
- resumes of key business owners
- a business plan
The Surety Company or Agent may decline to issue a bond without an SBA guarantee. If, however, the Surety Company applies to SBA for the bond guarantee, completion of the following forms is necessary:
- SBA Form 994, Application for Surety Bond Guarantee Assistance
- SBA Form 912, Statement of Personal History
- SBA Form 994F, Schedule of Work In Process
- Does SBA issue bonds?No. SBA does not issue bonds. SBA guarantees bonds issued by participating surety companies.
- What types of businesses are eligible to participate in SBA’s Surety Bond Guarantee program?Generally, all small businesses, whether they are sole proprietorships, partnerships, or corporations, are eligible to participate.
- What is the maximum contract size that can be considered for an SBA bond guarantee?Individual public and private contracts and subcontracts of $6.5 million or less are eligible. SBA can guarantee a bond for a contract up to $10 million if a Federal contracting officer certifies that SBA’s guarantee is necessary for the small business to obtain bonding. There is no limit to the number of bonds that can be guaranteed for any one contractor.
- May I change agents and/or surety companies?SBA does not designate a particular agent or surety company for a small contractor. The small contractor is free to change agents or sureties.
- My business is incorporated in one State, but most of my work is done in another. Which SBA office would handle my application?The application is handled by the SBA Area Office that services the State where your business is located. Only applications in the Prior Approval Program must be reviewed and approved by SBA.
- Do I have to be an 8(a) contractor to participate?No. You do not have to be a participant in 8(a) to participate in the Program.
- May I obtain an SBA bond guarantee even though I am not a U.S. citizen?Yes, but you must be a legal alien bearing a registration card that entitles you to work in the United States.
- May I obtain an SBA guarantee even if I have been bonded before without one?Yes. If a contractor is unable to obtain a bond on reasonable terms and conditions, an SBA guarantee may be provided. Please note, a contractor must not obtain some bonded work without an SBA guarantee and other work with the SBA guarantee. All bonded work must be SBA guaranteed.
- What are my costs for obtaining an SBA bond guarantee?All final bond (Payment/Performance) applications require you to pay a fee amounting to .729% of the contract price. If for some reason the bond is cancelled or not issued, the guarantee fee will be returned. SBA does not charge a contractor for bid bond guarantees.
- How long does it take for SBA to process an application?Generally, it takes only three to five days to process an application.
- May I contact SBA regarding the status of my application?Since SBA’s contractual relationship is with the surety, SBA does not interact directly with contractors. You must contact your agent or surety to find out the status of your application.
- How long can I participate in the program?There is no limit on the length of time a contractor may participate, but the goal is to help contractors become bondable without SBA assistance.
- May I use both the Prior Approval and PSB programs to get an SBA guarantee?Yes. You are free to choose from either program in order to obtain an SBA guarantee.
Source: State of California Contractors State License Board, “Frequently Asked Questions” http://www.cslb.ca.gov website. Accessed March 31, 2015. https://www.sba.gov/content/frequently-asked-questions-0
© Copyright 2014. All rights reserved. This content is strictly for informational purposes and although experts have prepared it, the reader should not substitute this information for professional insurance advice. If you have any questions, please consult your insurance professional before acting on any information presented. Read more.
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