Article Date: 03/21/2014

Program for Helping Small and Emerging Contractors Gets a Major Shot in the Arm, But Is Major Surgery Needed?

By Steve Rizer


Congressional legislation to reinvigorate the U.S. Small Business Administration’s (SBA) Bond Guarantee Program (BGP) inched closer toward enactment earlier this month, but even if the bill (H.R. 776) gets passed into law, would BGP -- a program whose mission is to obtain surety bonds for small and emerging contractors so that they can work on public projects -- be operating the way it should?


The Surety & Fidelity Association of America (SFAA) has been working with Congress and SBA on comprehensive overhaul of the program, but the necessary support for such a major change has proven elusive in recent times. Rather, to reinvigorate the program, Congress recently began to enact some key changes by including them in larger procurement legislation. In 2012, Congress enacted legislation that permanently raises the maximum amount of the bond that SBA can guarantee from $2 million to $6.5 million and prevents the SBA from unraveling bond guarantees made with SBA’s prior approval. Another new provision permits SBA to guarantee a bond up to $10 million if a contracting officer of a federal agency certified that such a bond guarantee is necessary. SBA made the higher bond guarantees available soon after the law became effective.


Now, H.R. 776 addresses the most important change that SFAA believes the program still needs. The measure would increase the maximum bond guarantee to sureties using BGP’s Preferred Surety option from 70 percent to 90 percent, a provision that the House Small Business Committee endorsed via a March 5 voice vote. The passage of H.R. 776, combined with the prior reforms, goes a long way toward making BGP more attractive to sureties and bond producers. What else can be done to improve BGP, which for “many” sureties does not make financial sense in the program’s current state, according to SFAA?


In addition to a legislative remedy, SFAA would like the Obama administration to address the issue of fees for surety companies participating in the program. “The more expensive the program is for people to participate, the less incentive there is,” SFAA President Lynn Schubert told ConstructionPro Week (CPW).


In 2005, SBA proposed changes to its regulations to increase the guarantee fee to surety companies from 20 percent to 32 percent of the premium on bonds issued and guaranteed under BGP. Such a fee increase -- a 60 percent hike -- would have made the program “economically unattractive for most sureties, which already write bonds with very little margin,” Lenore Marema, SFAA’s vice president of government affairs, told CPW. “This reduction in the premium for the surety also could have affected the viability of the program. SBA reconsidered its fee increase and promulgated a regulation changing the percentage of the premium charged to sureties from 20 percent to 26 percent, instead of 32 percent, and also increased the fees charged to the small businesses obtaining a bond through the program. There have been no changes in the fees since then. A change back to 20 percent would encourage more participation by sureties, but this is a regulatory issue, not legislative.”


Another change to BGP “that we think might make some sense” is to combine the Preferred Surety option and the Prior Approval option into one program, Schubert said.


The ConstructionPro Network member version of this article includes an assessment about H.R. 776's chances of passage as well as coverage of new legislation potentially affecting architects, engineers, and others within the construction community. 



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