January 28, 2021

SBA Surety Bond Guarantee Program Explained

The Small Business Administration’s (SBA) Surety Bond Guarantee Program (SPG Program) allows small contractors to qualify for surety bonds on projects with a total project cost of up to $6.5 million. The purpose of the SPG program is to “set-aside” funding for minority owned businesses, increase surety bond capacity for growing contractors, and make surety credit available to contractors who would otherwise not qualify for bonds in standard surety markets. The program is a great alternative to non-standard contract programs that can include collateral or funds control, usually deal-breakers for most contractors. Insurance agents can access the SPG program through BondExchange to expand their offering to contractors for bid and payment/performance bonds. In this article, we provide insurance agents with the information needed to help their contractor customers navigate the SBA Surety Bond Guarantee Program.

Why Do Contractors Need to Purchase Bid and Payment/Performance Bonds?

Contractors seeking advice from agents often ask why they need a bond. The short answer is to blame it on the government. In 1935, congress passed The Miller Act which requires contractors to obtain payment and performance bonds on all qualified federal public works projects that exceed $100,000. Most states have enacted what are known as “Little Miller Acts”, which mirror the federal legislation at the state-level.

What is the SBA Surety Bond Guarantee Program?

The SBA Surety Bond Guarantee (SBG) Program aims to encourage surety companies to issue more bonds for small and emerging contractors that would have otherwise been declined. The SBA guarantees payment of up to 90% of losses sustained by the Surety for a fee, substantially reducing the risk to the Surety.  The SBG Program is available for contracts of up to $6.5 million in size, or $10 million if a federal contracting officer certifies the bond.

What are the Benefits of the SBG Program to Contractors?

As mentioned above, the SBG Program allows contractors to bid on and undertake construction projects they would not be able to qualify for on their own. For emerging contractors with little or no bonded project experience, the SBA Quick Program allows contractors with challenged credit to qualify for jobs up to $400,000 in size. For larger bond requests, most surety companies require CPA reviewed or audited financial statements with certain standards for working capital (current assets less current liabilities), net worth, profitability, etc. The SBG program significantly reduces the underwriting standards for financial review, allowing contractors to bid on projects while still growing their business. Simply put, the program allows small but capable contractors to bid on more projects by providing surety companies with financial backing.

Who Qualifies for the SBG Program?

The SBG Program was created to help small contractors compete for more government contracts. The  program is only available to contractors who are not able to obtain a bond without the SBG Program. The SBA will examine the following criteria when determining a contractor’s program eligibility:

Need for a Bond

• The contractor must need a bond as a prerequisite for bidding on or performing contract work

Availability of a Bond

• The contractor must be unable to obtain a bond without the assistance of the SBA

Partial Subcontract

• The contractor must be fully responsible for the oversight and management of all subcontractors and needs to perform at least 15% of the project in house

Debarment

• All owners with at least a 20% ownership interest in the contracting company must prove they are not currently debarred, suspended, proposed for debarment, declared ineligible, or voluntarily excluded from transactions with any Federal department or agency

Size 

• To qualify, general contractors must have $39.5 million dollars or less in annual revenues, while trade contractors must have $16.5 million or less.

Moral Character

• SBG Program applicants must prove they are of strong moral character to be eligible for assistance. The SBA will examine factors such as the contractors criminal history and history of bond claims when determining the contractor’s moral character.

Capacity

• The contractor must demonstrate they are able to successfully complete the project the bond is being applied for. Generally, the contractor would need to have completed a project of at least half of the size of project that requires bonding.

Additionally, the SBA imposes the following minimum requirements based on the size of the project:

Minimum requirements for contracts up to $400,000 (“SBA Quick Program”)

• No tax liens
• No open bankruptcies
• No criminal convictions or pending charges
• No past due child support
• No maintenance clauses greater than 2 years
• No liquidated damages clause greater than $5,000 per day
• Applicant must be performing at least 20% of the work
• Work cannot be more than 50% complete at the time of application
• No asbestos, remediation, pool contractors, demolition, or software development
• Bid spread cannot be larger than 20%

Minimum requirements for projects over $400,000 (“SBA Full Program”)

• All of the SBA Quick Program requirements
• Suitable explanation of any settled judgments or lawsuits
• No liquidated damages clause greater than $5,000 per day
• Working capital of at least 5% of the current request plus the cost to complete existing work in progress
• Contract amount limited to two times the largest prior contract in the same scope of work
• Financial statements
  • Liability limits up to $2 million: In-house financial statements
  • Liability limits up to $5 million: CPA Reviewed Financial Statement
  • Liability limits over $5 million: CPA Audited Financial Statement

How Much Does an SBG Program Bond Cost?

The SBA charges a fee of 0.6% of the total contract price when guaranteeing a bond. In addition to this fee, contractors will also need to pay a premium on the bond, which will generally range between 1% – 3% of the contract amount. At BondExchange, we do not charge a fee for bid bonds, and there is no application fee for the SBG Program. Below is an example on a $500,000 SBA Contract Bond.

Example: $500,000 SBA Contract Bond Cost Calculation

Total cost of $11,500

How Do Contractors Apply for the SBG Program?

To apply for the SBG Program, contractors will need to contact an Authorized SBA Agent, like BondExchange, to receive an application. After the contractor has completed their application and provided the required underwriting information, the authorized agent will determine the contractor’s eligibility for the program. If the contractor is deemed eligible, the authorized agent will issue the bond, thus allowing the contractor to participate in the bidding process or begin work on the project should the contractor be awarded the contract.

At BondExchange, we help make this process easier. Insurance agents need to simply login to their account and use our keyword search to find the “contract” bond in our database. We will then provide your customer with the SBG Program application form, and help walk you through the bonding process. Don’t have a login? Enroll now and let us help you satisfy your customers’ needs.