Most federally funded projects and even some privately funded ones require contractors to obtain payment and performance bonds. Unfortunately, qualifying for those bonds can be a challenge for small construction businesses.

One potential solution is to obtain a surety bond guarantee from the U.S. Small Business Administration (SBA). Here are three frequently asked questions about the agency’s Surety Bond Guarantee Program (SBGP).

1. How small is small?

To be eligible for the SBGP, a construction company must qualify as a “small business.” For most building and heavy construction companies, a small business is one with average annual receipts of no more than $45 million. The threshold is $19 million for most specialty trade contractors. The contract must be small as well: Up to $10 million for federal contracts and up to $6.5 million for nonfederal contracts.

2. What’s guaranteed?

Under the SBGP, the SBA guarantees a portion of a surety’s losses — from 70% to 90%, depending on the specific program — in the event the covered construction business defaults. There are two programs within the SBGP: The Prior Approval Program and the Preferred Surety Bond Program.

Under the Prior Approval Program, the SBA guarantees 90% of a surety’s losses on contracts that are either:

• Valued at $100,000 or less, or
• Awarded to certain socially and economically disadvantaged contractors.

Examples of disadvantaged contractors include military veteran business owners, service-disabled business owners, and eligible contractors whose companies operate in a Historically Underutilized Business Zone — commonly called a “HUBZone.”

For contracts that don’t fall within either group, the SBA guarantees 80% of a surety’s losses. Under this program, the surety must obtain the SBA’s approval before issuing a bond. There’s a streamlined approval process for contracts valued at $250,000 or less, called the Quick Bond Program, which combines the contractor’s application with the guarantee agreement between the surety and the SBA.

The Preferred Program allows SBA-approved sureties to issue bonds without prior approval. The SBA offers a 70% guarantee under this program.

3. How can we get a guarantee?

To obtain a bond guarantee, start by finding a participating surety. Complete the surety’s application and, if the surety determines that an SBA guarantee is needed for it to issue a bond, complete any necessary SBA forms for the appropriate program. The surety should be able to assist you with this.

Keep in mind that contractors who receive bond guarantees under the SBGP must pay the SBA a fee of 0.6% of the contract price, in addition to the surety’s fees. If you’re unsure whether the program is right for you, consult your CPA for help weighing the costs vs. benefits.

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