SBA aims to boost surety bond guarantees in disaster areas

With floodwaters in Nashville and an oil spill in the Gulf, small businesses have their eyes set on moving into these afflicted areas. Doing so would be made easier by the U.S. Small Business Administration’s proposed increase in surety bond guarantee limits. The purpose is to make bigger contracts in disaster areas more accessible to service-sector and construction businesses.

The recent proposals
The SBA posited new rules, including:

  • A bond may be issued if the product or service will be manufactured or performed, respectively, in the disaster area for non-federal contracts and orders up to $5 million.
  • If a federal contract or order up to $5 million will directly assist the impacted area the performance site does not need to be within the area.
  • Federal contracts or orders can have a guarantee of $10 million per the request of an agency’s head that is aiding reconstruction efforts.

All of these proposals add to surety bond increases that the American Recovery and Reinvestment Act of 2009 made possible. Pending the SBA’s extension for the increased amounts of a specific disaster, the higher bond guarantee limits would be effective for one year after the disaster declaration.

The SBA Office of Surety Guarantees
For almost four decades, the office has helped small and minority business earn more contracts. The office of Surety Guarantees oversees the Surety Bond Guarantee (SBG) program by partnering with the surety industry. Companies that work with the SBA issue bonds. A percentage of these bonds are backed by the SBA in case of a contractor’s default. Two different programs in the SBG program guarantee either 90 percent or 70 percent of bonds issued by a surety company.

Through September 2010, the SBA will guarantee bonds on contracts valued up to $5 million. It is a temporary increase that remains in place through September 2010. Contracting officers that prove a guarantee is in the government’s best interest, the SBA will guarantee contracts up to $10 million.

How surety bonds work
Surety bonds, unlike insurance, involve three parties: the principal, the obligee and the surety. Rather than protect any party from financial loss, surety bonds simply compensate the obligee, or project owner, if the principal, or contractor, fails to fulfill all contractual agreements.

The SBA teamed up with surety industry to make more bonds available to companies that would struggle to get them in the general market. In doing so, surety companies are repaid for losses incurred when a contractor defaults.

More on the SBA’s proposed rules
In the proposal, the SBA emphasizes that it does not pay insurance or indemnification costs that are a part of a bonded contract. In 2008, an act increased eligible amounts for orders and contracts related to a certain disaster. For a list of recently declared disasters, businesses can check the Federal Emergency Management Agency website.

“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 the SBA Administrator Karen Mills in a press release.

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About the Author

Chris Birk
Chris Birk is a former newspaper and magazine writer who now works for a pair of Inc. 500 companies. He’s also a principal and the chief content creator for Surety, and a part-time college professor at a private Midwestern university.

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