Bonding is an Effective Tool for Small Businesses

The term is bonded … surety bonded.

By Al Titone , District Director of the US Small Business Administration’s New Jersey District Office On Nov 2, 2015

If you are a small contractor that wants to compete for large government projects, chances are you are going to need a surety bond. A surety bond simply ensures contract completion in the event of contract default. Any federal construction contract valued at $150,000 or more requires a surety bond when bidding, or as a condition of the contract award. Small contractors will also find that most state and municipal governments – as well as private entities – will also have similar requirements. In addition, many service contracts and occasionally supplier contracts may also require surety bonds.

Differentiating the Types of Bonds

• Bid Bond: Ensures the bidder on a contract will enter into the contract and furnish the required payment and performance bonds if awarded the contract.
• Payment Bond: Ensures suppliers and subcontractors are paid for work that is performed under the contract.
• Performance Bond: Ensures the contract will be completed in accordance with the terms and conditions of the contract.
• Ancillary Bond: Ensures that requirements integral to the contract, but not directly performance related, are performed.

Through the US Small Business Administration’s Office of Surety Guarantees, the SBA provides and manages surety bond guarantees for qualified small and emerging businesses, in direct partnership with surety companies.

The Underwriting Process

During the underwriting process, a surety company or an agent may find that the small business presents a degree of risk beyond that which the company or agent is willing to assume without the SBA Guarantee. For example, a small business may have limited working capital or lack evidence of prior, successful contract performance that causes concern. Under the Surety Bond Guarantee program, SBA guarantees between 70 and 90 percent of the losses and expenses incurred by the surety company should the small business default and fail to complete the contract. This government guarantee encourages the surety company to issue a bond that it would otherwise not issue to a small business.

To Qualify

• Your business must be classified a small business under SBA Size Standards.
• You must need an SBA Guarantee to obtain a bond.
• The size of the public or private contract or subcontract must not exceed $6.5 million or $10 million if a federal contracting office certifies that SBA’s guarantee is necessary to obtain a bond.
• Your business must satisfy credit, capacity and character evaluations completed by the surety company.
• There must be a reasonable expectation of successful contract performance.
• The contract must require a bond.

How to Apply

To apply for a surety bond through the SBA’s program, you must first choose a surety company or bonding agent who represents a participating surety company. For a listing of representatives that service New Jersey, or for additional information on SBA’s Surety Guarantee program, visit www.sba.gov/osg.

Additional questions about SBA’s Surety Guarantee program may also be directed to Jennifer Vigil, area office director of SBA’s Office of Surety Guarantees at [email protected], or by calling her at 303-927-3489.

About the Author: Al Titone is the District Director of the US Small Business Administration’s New Jersey District Office.

 

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