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Surety Bonds

Aiming to help spur economic recovery, the U.S. Small Business Administration has made it easier for smaller contractors to obtain the bonding necessary to compete for big-time construction jobs.

The agency recently boosted its guarantees on surety bonds for both public and private contracts. In most cases, the SBA will guarantee bid, performance and payment bonds on contracts up to $5 million.

The guarantee can increase up to $10 million for federal projects if the government decides it's in the public's best interests. There's also no limit on how many bonds any one contractor can have guaranteed by the SBA.

In essence, surety bonds are three-way agreements among a surety company, an obligee (the project owner) and the principal (the entity contracted to perform work). The surety bond guarantees that the principal will follow a specific contract. If the principal fails to comply, the surety is on the hook to ensure the work is performed or appropriate financial compensation is provided.

The SBA Surety Bond Guarantee Program
The SBA created its Surety Bond Guarantee Program to help small contractors who might otherwise struggle to purchase surety bonds through the traditional channels. The government doesn't actually issue the bonds, but instead provides a guarantee on a percentage of loss in the event a contractor defaults.

Who's Eligible?
Small business owners interested in participating must meet the fiscal standards in place by a given surety company, which will ultimately issue the necessary bonds. Again, the government only insures a portion of them. Contractors are still responsible for purchasing a surety bond through an approved company. Along with the surety company's requirements, the SBA also has the following requirements: *Contractors must meet the small business size standard specified for federal prime contracts. Those can range from $31 million in average annual receipts for heavy and civil construction to $13 million for specialty trades. *Contractors and affiliates must meet the North American Industry Classification System (NAICS) Code small business size standard.

What Types of Bonds are Covered?
Five major contract/construction bonds are covered: Bid, Payment, Performance, Ancillary and Reclamation.

What Do These Guarantees Cost?
Contractors will have to pay a nonrefundable fee of $7.29 per thousand dollars of contract value for a bond application.

-- This article was provided, a nationwide surety bond agency.

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