Many times a construction or service contractor bidding on a project finds that a surety bond(s) is required and that they cannot proceed because they are unable to qualify for the surety bond(s). A surety bond is often required to protect the project owner from losses resulting from nonperformance or noncompliance by the contractor. Federal, state, county and local government entities typically require surety bonds, but the project owner may also be a private company.
I recently participated in a Small Business Administration (SBA) webinar on surety bonds and the SBA Surety Bond Guarantee Program and I would like to share with you some of the information the SBA provided.
A contractor obtains the surety bond through a surety company or agent representing surety companies. The surety company that provides the surety bond becomes responsible for paying claims if the contractor defaults on the contract. Having the surety bond provides assurance to the project owner that the work will be successfully completed according to required terms and conditions. This type of surety bond is called a performance bond.
Other types of surety bonds that may be required in relation to a contract are a payment bond and a maintenance bond. The payment bond guarantees that subcontractors and suppliers will be paid for their work on the project.
The maintenance bond guarantees that any defects in workmanship or materials will be remedied with a certain time frame. There may even be a bid bond required which guarantees that if the contractor is awarded the contract, they will provide the required performance and payment bonds.
The SBA provides surety bond guarantee assistance to contractors by partnering with surety companies
and their agents through the SBA Surety Bond Guarantee Program. By providing these guarantees, the SBA strengthens the ability of small businesses to compete in the market. The SBA may provide the surety company a guarantee of up to 90%, which reduces the surety company’s liability.
The surety company is then able to issue surety bonds to contractors that may not otherwise qualify. Some reasons that a contractor may have difficulty qualifying for a surety bond are having limited financial resources, credit issues, limited track record and recent losses.
The first step in the application process is that the contractor contacts an SBA approved surety bond agent to get assistance. The agent evaluates the contractor and obtains approval from the surety company to proceed. The agent applies to SBA for the surety bond guarantee. The application is reviewed by the SBA and qualified applicants are approved. The agent then provides the surety bond to the contractor.
But be aware that it is not certain that you will obtain the surety bond, even if you are dealing with an SBA approved surety bond agent. Your company will be evaluated by the agent on criteria such as technical & managerial ability, track record, financial resources, financial statements, profitability, credit resources and credit history.
The guarantee reduces the surety company’s liability but it does not work miracles. The surety bond agent must have a certain comfort level with your business before applying to the SBA for the guarantee. And an SBA approved surety bond agent will be very familiar with the SBA’s criteria.
You should start working now to be better prepared to apply for a surety bond. You need to thoroughly understand your business’s current financial position. This will require you to have quality financial statements prepared for your business (preferably by a CPA). You should be able to understand these statements so you will know your business’s current financial status and can work to improve it.
Your local Small Business Development Center (SBDC) can assist you with analyzing and understanding your business’s current financial situation. Go to www.georgiasbdc.org to find your nearest SBDC in Georgia.
You can learn more about the SBA Surety Bond Guarantee Program, including how to find a participating surety bond company or agent, at www.sba.gov/surety-bonds.
Connie Edwards is a Business Consultant with the University of Georgia Small Business Development Center in Savannah and she may be contacted at cedwards@georgiasbdc.org.
