SBA Considers Increasing Surety Bond Guarantees in Wake of Disasters

In the midst of tornado season and as oil spills into the Gulf of Mexico, small businesses nationwide look to operate in battered regions. A number of changes proposed by the Small Business Administration plan to help small and minority contractors land large contracts in disaster areas by increasing surety bond guarantee limits.

Plan Details
The SBA’s most significant proposals:

  • Non-federal contracts and orders up to $5 million may earn a bond if the product will be made or service will be provided in the disaster area.
  • The performance site need not be in the disaster area if a federal contract or order up to $5 million will directly assist the area.
  • Agency heads who are involved with reconstruction efforts can request guarantees for contracts or orders up to $10 million.

Although the American Recovery and Reinvestment Act of 2009 included surety bond increases, these hikes pitched by the SBA plan to add to those in the act. Should these new limits take effect, the higher bond guarantee limits last for one year after the declaration of a disaster unless the SBA extends the duration for a particular disaster.

“These proposed changes are one more way we can help small businesses, particularly in the construction and service sectors, compete for and win critical contracting opportunities that help them grow their business and create jobs,” said Karen Mills, the SBA administrator, in a press release.

An office within the SBA
Since 1971, the SBA has worked with the surety industry so small service-sector and construction companies could get bonds otherwise unavailable in the commercial market. In creating this public-private relationship, the SBA’s Office of Surety Guarantees manages the Surety Bond Guarantee program. By backing a certain percentage of bonds, the SBA gives surety companies the confidence to issues bonds.

When contractors default on a project, the SBA recompenses the sureties a certain percentage of the bond amount. The Prior Approval program and the Preferred Surety Bond program guarantee 90 percent and 70 percent of surety’s loss, respectively. Last year the SBA raised the limit on bonds to $5 million from $2 million. In some cases, the SBA will guarantee bonds up to $10 million. These heightened maximums remain in effect through September 2010.

Surety bonds do not protect bond holders against a loss. Instead they repay the obligee when contractors default. The surety then seeks repayment from the contractor. With SBA surety bonds, the surety companies are actually the obligees and the government is the surety.

The SBA made it clear in its proposal that any insurance or indemnification costs in a bonded contract are not its responsibility, and therefore the SBA will not cover those costs. Businesses can find a list of recently declared disasters on the Federal Emergency Management Agency’s website.