For this week’s Guest Post Friday, Construction Law Musings welcomes Danielle Rodabaugh. Danielle (@DaRodabaugh) is the chief editor at SuretyBonds.com, a surety provider that works with construction professionals across the nation. Danielle writes to help construction professionals and their lawyers better understand the intricacies of the surety market.
From time to time, contractors struggle to get the surety bonds they need to work on certain projects. Fortunately, the Small Business Administration’s Office of Surety Bond Guarantees program provides bonding services to construction professionals who cannot qualify for contractor bonding in the commercial market. Through its program, the SBA guarantees bid, payment and performance bonds that prevent financial loss when contractors default or fail to fulfill contractual terms. As such, the SBA helps small contracting firms get the bonds they need while also protecting project owners owners from losing their investments.
The bonding process is confusing enough on its own. When government agencies such as the SBA get involved, they should limit the frustration construction professionals and project owners have to deal with, not increase it. However, this isn’t always the case.
When the SBA backs a bond, the public or private contract/subcontract typically cannot exceed $2 million. Contractors who don’t qualify for commercial contractor bonds can get multiple SBA-backed bonds each year, but the individual contracts may not exceed $2 million each.
As time has progressed, it’s become increasingly clear that the SBA’s $2 million bonding limit per contract is no longer realistic. Despite a significant amount of inflation throughout the past 40 years, the limit has not been permanently increased since the program was established in 1971. Instances of temporary increases in the programs’s bonding limits suggest the SBA is fully capable of backing bonds for projects that cost more than $2 million.
In 2010, the SBA increased its maximum bonding capacity for individual projects in disaster areas only. The standard limit was increased to $5 million in and around disaster areas. However, if the head of an agency involved in reconstruction efforts made a special request to the SBA, a bond could guarantee up to $10 million for a single federal contract. These temporary increases are effective for 12 months following a disaster declaration, unless the SBA allows an extension related to a particular disaster.
Furthermore, under the American Recovery and Reinvestment Act of 2009 — followed by the the American Jobs Act of 2011 — the program’s $2 million bond limit was temporarily increased to $5 million across the board through fiscal year 2012, which will soon come to a close. As such, a number of stakeholders have begun discussing the importance of permanently increasing the SBA’s bonding limit for individual contracts.
On October 6, 2011, the Congressional Research Service released a report outlining the SBA Surety Bond Guarantee Program. It concludes by examining proposals to increase the program’s $2 million bond limit.
On March 19, 2012, the House Committee on Armed Services released a report called “Challenges to Doing Business with the Department of Defense” that suggested the Small Business Administration increase its $2 million bonding limit for individual contracts. According to the report, “As defense contracts have gotten larger, the Small Business Administration’s (SBA) $2 million per contract limit for surety bonds is insufficient to help small businesses.” In the report’s conclusion, the panel recommends the SBA increase its current $2 million bonding limit to $6.5 million government-wide, or at least for projects funded by the DOD.
Generally speaking, those opposed to the increase argue that higher bonding limits could result in an increased risk for program losses. Those who support the increase point to the SBA’s successful experience with Recovery Act bonds, which were issued in amounts greater than $2 million, and claim that raising the limit will not necessarily lead to an increased risk of program losses.
Perhaps the most compelling argument in favor of a blanket bonding capacity increase for the SBA’s program is this excerpt from the DOD’s report.
“Increasing the program’s limit would increase the opportunities for small businesses to compete for federal contracts, especially in those departments, such as the Department of Defense, where the average size of construction contracts awarded to small businesses for fiscal year 2010 exceeded $5.9 million – nearly triple the size for which SBA can provide bonding support.”
When an average federal construction contract costs three times more than a bond the SBA can guarantee, small contracting firms have virtually no means through which they can get bonds as required by law. Thus small construction businesses are automatically disqualified from the bidding process, leaving only larger contracting companies to compete for government contracts.