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SBA Bonds Create Opportunity and Minimize Risk

The recent approval of the National Defense Authorization Act of 2013 included an important provision that allows the U.S. Small Business Administration (SBA) to triple the support (from $2 million to $6.5 million) it can provide to sureties for a single job. In addition, the SBA can increase the guarantee for federal contracts to $10 million, provided that a federal contracting officer certifies its necessity. These increases are significant and have long been needed.

The SBA increases pave the way for small and minority businesses to capitalize on opportunities for larger contracts. While there are opportunities for direct contracts with agencies, the opportunities on large projects usually are obtained as a subcontractor, often through a large general contractor (GC) or construction manager (CM). GCs and CMs often require subcontractors to be bonded, as performance and payment bonds continue to be the most effective and predominant approach to avoiding subcontractor default.The recent SBA increases also can help CGs and CMs meet their minority goals on larger contracts. The increases have a two-fold positive effect: GCs and CMs reduce the project management cost of many smaller subcontracts while attaining a higher percentage of mandated small business and minority goals.

That said, before the SBA guarantee can come into play, a firm must still be prequalified by a surety. While some sureties utilize the SBA support as one of many underwriting components, the prequalification process does not change. Small businesses often falsely believe that the SBA that will provide them the required bonding. In reality, the surety provides the bonding and the SBA guarantee is simply utilized to help defray the risk of a firm that does not qualify on its own accord. As such, small business owners should work with a surety agent on the many components of prequalification.

Small and minority firms often focus solely on the contract opportunity and do not fully consider the bonding requirement until later. It’s often too late to be approved for bonding with only days or weeks before the contract is awarded. Prequalification creates a different dialogue with a GC or CM; it promotes goodwill and expedites the process to final terms.

Surety bonds are a vital mechanism to protect taxpayers and workers on public construction projects from the danger of contractor default. The SBA increases will help create significant job opportunities for small and minority businesses. To capture this unprecedented opportunity, small and minority firms must invest the time to be bond-ready. Visit http://www.minoritybdi.org to learn the steps to prequalification and to access all of the associated documents needed in the process.

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