The type of surety bond with the greatest impact on small contractors and their business goals is a contract bond.
Contract bonds can be further broken down into public and private sector construction bonds.
Set-asides and Performance Bonds
The U.S. Small Business Administration can limit competition for certain contracts via small business set-asides. Competitive set-aside projects are typically less than $150,000 and can be open to any small business or limited to small businesses that participate in SBA contracting assistance programs.
Sole source set-aside contracts are not competitively bid. This usually happens where only a single business can fulfill the requirements of a contract. Some set-asides are for small businesses in certain categories, such as 8(a) Business Development, HUBZone, Women-owned Small Business and Service-disabled Veteran-owned.
Federal and state governments have regulations that require a performance and payment bond for each contract exceeding a certain specified amount called the bond threshold.
For federal (Miller Act) projects, the threshold amount is $150,000. For state (little Miller Act) projects, the threshold varies from state to state but is typically less than $100,000. These relatively low thresholds result in a large amount of federal and state construction projects to be bonded.
These projects are generally competitively bid, and the lowest qualified bidder receives the contract award. When small contractors get qualified with an acceptable surety, they can enter their bid and compete for public sector construction work.
Federal and state governments also frequently have regulations that require a certain percentage of work to be performed by certain contractor groups that meet specified requirements. Some of these specified groups include women and minority business enterprises and disadvantaged business enterprises.
For example, the United States Department of Transportation established a DBE program through the Safe, Accountable, Flexible, Efficient Transportation Act that provides opportunities and increases participation for state and local transportation agencies that receive financial assistance from the U.S. DOT.
At the state level, the Maryland General Assembly enacted legislation in 1978 to create an MBE program that requires state agencies to make every effort to achieve an overall goal of 29 percent MBE participation on the total dollar amount of all procurement contracts.
Licensing and Lien Bonds
In the private sector, there is no requirement for the use of contract bonds on construction projects. Yet, many private owners choose to require contract bonds on their projects to protect their interests in the event of contractor failure.
Another type of surety bond that small contractors are required to have are license and permit bonds, also known as compliance bonds. These bonds are required by most states and some local governments and guarantee that a contractor will comply with the state and local government rules and regulations regarding the required contractor license.
This type of bond does not help generate revenue for small contractors similar to the required contract bonds for public work, but without these licenses, the contractor cannot legally perform the work in the jurisdiction of the local government that is requiring the compliance bond.
Finally, small contractors sometimes require miscellaneous bonds, such as a release of lien bond. A release of lien bond allows a discharge of a lien filed on real estate.
This type of bond is not often needed, but it can be very important to the contractors involved because it can allow them to continue to work on the job while the dispute is being resolved.
