Starting a small construction firm can be challenging, especially when contractors are unfamiliar with the surety bond process.
For this reason the U.S. Small Business Administration provides bonding services through its Office of Surety Guarantees. The program works with licensed surety providers from across the nation to help qualifying construction firms get the surety bonds they need.
To be eligible for an SBA surety bond guarantee, the following criteria must be met.
1) A business must be classified as “small” according to the Code of Federal Regulations, which provides a list of size standards by industry sector and subsector. For the construction industry, this means the company’s average annual receipts cannot exceed
- $33.5 million for general building and heavy construction contractors
- $14 million for special trade construction contractors
- $7 million for land subdivision contractors
- $20 million for dredging contractors
2) A business must be unable to get a bond without an SBA guarantee. In other words, the contractor has no other way to get the needed bond.
3) The public or private contract/subcontract cannot exceed $2 million. The SBA does not back surety bonds on projects that cost more than $2 million.
4) The business owner must submit financial credentials to the surety for review. Based on this information, the surety must conclude that the contractor will successfully fulfill the contract. If the financial credentials are not strong enough, the contractor will not qualify.
5) The contract must require a bond to be eligible. Projects for which a surety bond is optional do not qualify for an SBA backed surety guarantee.
Contractors who meet these criteria can apply for a bond backed by the SBA on the agency’s website. If a contractor’s application is approved, the SBA will charge the small business owner a fee that’s calculated as .729% of the contract amount. So if a project is contracted for $100,000, the contractor will pay the SBA a $729 fee for the bond, which is significantly lower than premiums charged by many surety providers. The SBA does not charge a fee to issue a bid bond.
If a contractor backed by an SBA surety bond should default and fail to fulfill the contract, the SBA will cover between 70 and 90% of the resulting losses and expenses incurred by the surety. In this way the SBA surety guarantee encourages sureties to underwrite bonds they might not typically issue to some small businesses.