In September 2018, the U.S. Small Business Administration announced it is lowering fees for its Surety Bond Guarantee (SBG) Program. This is the first time that the SBA has decreased its fees in 12 years.
The SBG Program is targeted towards small and emerging contractors. It provides such businesses with an option to obtain surety bonds that they need for bidding on construction projects. Without the backing of the SBA, they usually wouldn’t be able to get the necessary bonding.
The fee decrease is designed to assist small businesses in a direct way, allowing them easier and cheaper access to the SBG Program. The reduction also aims to create a higher incentive for surety providers to issue bonds for small and budding construction companies.
The SBG Program in a Nutshell
The Surety Bond Guarantee Program aims to help small construction companies obtain the contract surety bonds they need, so that they can execute higher-stakes projects. Typically, these businesses would not be able to get bonded due to their size or lack of track record in the field.
The SBA acts as an additional guarantee for obtaining bid, payment and performance bonds for applying companies that have been approved for participation in the program. These types of contract bonds are required when a construction business wants to bid on public or private projects.
Under the Miller Act, federal projects above $150,000 require contract bonds. Many state, county and local bodies have similar acts that impose bonding requirements. It is also popular among private project owners to demand contractors get bonded.
Bid bonds ensure that the awarded contractor would obtain payment and performance bonds. Performance bonds guarantee that the contracted work would be completed in time and according to the agreed quality standards. Payment bonds protect subcontractors and suppliers, ensuring the main contractor would make all due payments to them.
The federal contracts that the SBA can guarantee are up to $10 million, and $6.5 million for non-federal ones. Through the QuickApp option, it can guarantee projects for up to $400,000. As of September 2018, 34 surety providers are a part of the SBG Program, as well as 350 agents. For fiscal year 2018, 27,000 jobs have been supported, resulting in 3,000 bonds and $1.7 billion in bonded contracts.
What the SBG fees reduction means for contractors
The reduction of the SBG fees took effect as of October 1, 2018. It is applicable for surety bonds approved for guarantee for fiscal year 2019, running until September 30, 2019.
Previously, the SBG fee was 26 percent of the bond premium that small businesses are charged. The SBA now has reduced this to 20 percent, which is a significant change. Additionally, the contractor fee used to be $7.29 per thousand dollars of the contract amount, which is now lowered to $6 per thousand dollars.
The fee decrease is a smart SBA move that is likely to have a strong positive effect on small construction companies in the U.S. that want to expand their activities. The lower fees make the SBG Program more easily accessible. In this way, more businesses would be able to participate it in and get guarantees for their contract bonds. This, in turn, means that more contractors would have access to bidding on projects and participating in them. Small businesses can now also present lower bid prices, making their offers more competitive on the market.
In addition, the fee reduction is aimed at surety underwriters and agents as well. It is expected that the lower fees would make it more appealing for sureties to issue contract bonds to small businesses participating in the SBG program.
