Surety Bond Guarantee Program

The Small Business Administration's (SBA's) Surety Bond Guarantee Program is designed to increase small businesses' access to federal, state, and local government contracting, as well as private-sector contracts, by guaranteeing bid, performance, and payment bonds for small businesses that cannot obtain surety bonds through regular commercial channels. The program guarantees individual contracts of up to $6.5 million, and up to $10 million if a federal contracting officer certifies that such a guarantee is necessary. The SBA's guarantee ranges from 70% to 90% of the surety's loss if a default occurs. In FY2014, the SBA guaranteed 12,384 bid and final surety bonds with a total contract value of about $6.4 billion. A surety bond is a three-party instrument between a surety (who agrees to be responsible for the debt or obligation of another), a contractor, and a project owner. The agreement binds the contractor to comply with the contract's terms and conditions. If the contractor is unable to successfully perform the contract, the surety assumes the contractor's responsibilities and ensures that the project is completed. Surety bonds are viewed as a means to encourage project owners to contract with small businesses that may not have the credit history or prior experience of larger businesses and are considered to be at greater risk of failing to comply with the contract's terms and conditions. P.L. 112-239, the National Defense Authorization Act for Fiscal Year 2013, increased the program's bond limit, which had been $2 million since 2000, and was temporarily increased, from February 17, 2009, through September 30, 2010, to $5 million, and up to $10 million if a federal contracting officer certified in writing that a guarantee in excess of $5 million was necessary. Advocates of raising the program's bond limit argued that doing so would increase contracting opportunities for small businesses and bring the limit more in line with limits of other small business programs, such as the 8(a) Minority Small Business and Capital Ownership Development Program and the Historically Underutilized Business Zone (HUBZone) Program. Opponents argued that raising the limit could lead to higher amounts being guaranteed by the SBA and, as a result, increase the risk of program losses. This report examines the program's origin and development, including the decisions to (1) supplement the original Prior Approval Program with the Preferred Surety Bond Guarantee Program that provides a lower guarantee rate (not to exceed 70%) than the Prior Approval Program (not to exceed 80% or 90%, depending on the size of the contract and the type of small business) in exchange for allowing preferred sureties to issue SBA-guaranteed surety bonds without the SBA's prior approval; and (2) increase the program's bond limit.

Small Business Administration's Surety Bond Guarantee Program