For small construction companies, obtaining bonding can be a daunting task. If you’re having a hard time securing bid, performance or payment bonds, the U.S. Small Business Administration may have a solution.
The SBA’s Surety Bond Guarantee program recently increased the guarantee limits for bonds to $6.5 million per project, for qualified contractors. The program may be a good option for construction businesses that lack either the contracting experience or the financial strength to get a bond directly from a surety company.
Historically, this program is vastly underused in Idaho. In the last 12 months, only four contractors in Idaho have participated. To put that in perspective, Idaho contractors used the program for a mere $322,000 of final bond guarantees, while our neighbors in Washington state had more than $7.6 million, and Oregon came in at more than $7.1 million in final bond guarantees.
SBA personnel describe a significant increase in activity due to the newer guarantee amounts. They describe an ideal situation as one where a contractor needs a $2 million to $3 million bid bond and, due to recent conditions or newness to the industry, may not be able to secure the guarantee from a traditional surety. Under the program, the SBA guarantees up to 90 percent of a surety company’s potential losses for a bond. For example, if a contractor were to default on a $100,000 bond, the surety would be liable for only $10,000.
The program offers two options to obtain guarantees. Both require a traditional surety to assist in the process. First, authorized sureties can issue guaranteed bonds to contractors without prior SBA approval. The SBA will guarantee up to 70 percent of the amount of bonds written through this program. For payment or performance bonds, the agency charges 0.729 percent of the contract price, and there is no charge to the contractor for a bid bond guarantee. The SBA charges the surety company 26 percent of the fee being charged to the contractor for the bond.
Second, sureties may submit packages to the SBA for approval prior to the issuance of the bond. Here, the SBA reviews and approves the bond. In this instance, it will guarantee up to 90 percent for certain types of construction businesses, including veteran-owned companies and those in areas the government has declared historically underutilized business zones.
To apply for an SBA-guaranteed bond, you must be a small business under federal standards. The federal standards define “small” as general contractors having average annual receipts of $33.5 million or less. Specialty contractors have a lower limit, with average annual receipts of $14 million or less. In addition, you must be unable to secure bonding without the SBA’s backing. You must apply for an SBA guarantee through a surety – the SBA will grant the guarantee directly to that bonding provider — and the surety through whom you’re applying must reasonably expect that you can complete the job in question.
To find a bonding agent who fits your needs, the SBA has an approved list, by state, on its website at sba.gov. Once you find a surety company that participates in the program, you can submit your application via the selected surety, and it will deem that an SBA guarantee is necessary. Then an application will be completed and forwarded to the SBA for review and approval. Most are approved in as little as two days.
For contractors struggling to find bonding, the Surety Bond Guarantee program can be a lifesaver. But, of course, that doesn’t mean you should give up on working with your existing agent, who may still be able to secure an adequate amount of bonding capacity without the help of the SBA. Your agent can help you weigh your options and find the ideal bonding provider.
Robert Shappee is a certified public accountant licensed in the state of Idaho. He is a partner at the accounting firm of Harris & Co. PLLC and has more than 16 years of experience in accounting and finance. He is an active member of the Idaho AGC, the Construction Industry CPA’s & Consultants, and the Construction Financial Management Association. He can be reached at 333-8965 or email@example.com.