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General Information
The Program
The U.S. Small Business Administration’s (SBA) Surety Bond Guarantee (SBG) program can guarantee bid, performance and payment bonds for individual contracts of $2 million or less for small and emerging contractors who cannot obtain surety bonds through regular commercial channels. There is no limit to the number of bonds that can be guaranteed for any one contractor. SBA's guarantee gives sureties an incentive to provide bonding for eligible contractors, and thereby provides greater access to contracting opportunities. A surety guarantee, an agreement between a surety and the SBA, provides that SBA will assume a predetermined percentage of loss in the event the contractor should breach the terms of the contract.
SBA’s Role
The SBA Office of Surety Guarantees (OSG) administers the SBG Program as a public-private partnership between the federal government and the surety industry. The SBG program consists of the Prior Approval program (Plan A) and the Preferred Surety Bond (PSB or Plan B) programs.
What is a Surety Bond?
A surety bond is a three-party instrument between a surety, the contractor or principal, and the project owner or obligee. If the contractor is unable to successfully perform the contract, the surety assumes the contractor's responsibilities and ensures that the project is completed.
Types of Eligible Contract Bonds
Below are the types of contract bonds that may be covered by an SBA guarantee:
1. Bid - Bond which guarantees that the bidder on a contract will enter into the contract and furnish the required payment and performance bonds.
2. Payment - Bond which guarantees payment from the contractor of money to persons who furnish labor, materials equipment and/or supplies for use in the performance of the contract.
3. Performance - Bond which guarantees that the contractor will perform the contract in accordance with its terms.
4. Ancillary - Bonds which are incidental and essential to the performance of the contract.
5. Reclamation – A reclamation bond is eligible if it is issued to reclaim an abandoned mine site and for a project undertaken for a specific of time.
Ineligible Bonds
The following bonds are ineligible for the SBA guarantee:
1. Advance Payment
2. Coal Leases
3. Completion
4. Notary Bonds
5. License & Permit
6. Judical and Court
7. Public Official
8. Financial Guarantees
9. Forfeiture
10. Gas Leases
11. Grain Elevators
12. Lease
13. Subdivision
14. Reclamation Bonds for New Mining
15. Oil Leases
Program Eligibility
In addition to the surety’s bonding qualifications, SBA’s eligibility requirements for applying for an SBA bond guarantee are:
- For federal prime contracts, your company must meet the small business size standard for the North American Industry Classification System (NAICS) Code that the Federal contracting officer specified for that procurement. The small business size standard for heavy and civil construction is $31 million in average annual receipts
(except dredging, which is $18 million). If the contract is for one of the specialty trades, the size standard is $13 million. Size standards for providing services range as high as $32.5 million in annual receipts.
- For all other prime contracts and subcontracts for construction, service or supply (e.g. commercial, state and local) you qualify for surety bond assistance from the SBA if your annual receipts do not exceed the $6.5 million standard.
- The contract must be 2 million or less; and the contractor’s business must be independently owned and operated and qualify as a small business under federal regulations; and
- The contractor’s business must be independently owned and operated and qualify as a small business under federal regulations; and
In every case, an individual contract cannot exceed $2 million and must require bonds.
The SBA Guarantee
SBA reimburses a participating surety up to the guarantee percentage for the losses incurred as a result of a contractor's default on a guaranteed bid bond, payment bond, performance bond or any bond that is ancillary with such a bond.
1. Prior Approval (Plan A)
Under the Prior Approval program, an agent reviews the contractor’s application package and recommends it to the surety company for approval. If the surety company agrees to issue a bond with the SBA guarantee, the package is forwarded to the appropriate SBA/SBG Area Office and evaluated by SBG personnel. SBA must approve each bond guarantee individually, based on information submitted by contractor and the surety. If SBA determines that the applicant is eligible, SBA issues a bond guarantee to the surety company. The surety then issues the bond to the contractor. SBA's guarantee agreement is with the surety company, not with the small business contractor. Any surety company certified by the U.S. Treasury to issue bonds may apply for participation in the Prior Approval program.
SBA’s guarantee percentage is 90% if the contract is $100,000 or less or if it is awarded to a socially and economically disadvantaged or HUBZone contractor. If not, SBA’s guarantee is 80 percent.
2. Preferred Surety Bond (PSB)
The Preferred Surety Bond (PSB) program authorizes selected sureties to issue, monitor and service bonds without prior SBA approval. The SBA guarantee is 70% under this program. Each participating company has a guarantee limit with the SBA. The PSB program was created to encourage the larger surety companies to expand their efforts to help small businesses obtain bonds.
How to Apply
The SBA does not directly bond the contractor. The contractor chooses a bonding agent who represents an SBA surety participant. The contractor completes the surety application and the required SBG forms, providing the agent with the required credit, capacity and character information. The agent then underwrites the application and decides whether to execute with or without an SBA guarantee.
Duties of Surety Company
After the contractor completes the forms and furnishes the surety company with sufficient underwriting information, the surety company processes and underwrites the application in the same manner as any other contract bond application. The surety company decides whether to:
Execute the bond without the SBA's guarantee;
Execute the bond only with the SBA's guarantee; or
Decline the bond even with the SBA's guarantee.
If the surety company determines an SBA guarantee is required in order to provide the bond, it completes an SBA Form 994B: Underwriting Review and the SBA Form 990: Guarantee Agreement. If the guarantee is given under the Prior Approval program, these forms - and supporting documents - are submitted along with the Forms 994, 912, 994F, 1624 and 1261 to the appropriate SBA/SBG Area Office. If the guarantee is given under the PSB program, the forms are collected by the surety.
Duties of the SBA
Under the Prior Approval program the SBA determines an applicant's ability to complete the contract based on the information, documentation and underwriting rationale provided by the surety company. If the review establishes performance capacity, and all other aspects of the application are approved, an authorized SBA official signs a guarantee agreement and returns it to the surety company. If the review fails to establish performance capacity, the SBA seeks clarification from the surety underwriter. If performance capacity cannot be reasonably assured, the SBA rejects the application.
Cost of an SBA Guaranteed Bond
The SBA charges fees to the contractor and the surety company.
The fee SBA chargers the contractor is .729% of the contract price, or, $7.29 per $1,000.00. The fee SBA charges the surety is 26% of the premium (fee) that the surety charges the contractor.
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