SBA Surety Bond Guarantee Program

Robert Jay Dilger
Senior Specialist in American National Government

The Small Business Administration’s (SBA’s) Surety Bond Guarantee Program is designed to increase small businesses’ access to federal, state, and local government contracting, as well as private sector contracts, by guaranteeing bid, performance, and payment bonds for individual contracts of $2 million or less for small businesses that cannot obtain surety bonds through regular commercial channels. The SBA’s guarantee ranges from 70% to 90% of the surety’s loss if a default occurs. In FY2011, the SBA guaranteed 8,638 bid and final surety bonds with a total contract value of about $3.6 billion.

A surety bond is a three-party instrument between a surety (someone who agrees to be responsible for the debt or obligation of another), a contractor, and a project owner. The agreement binds the contractor to comply with the terms and conditions of a contract. If the contractor is unable to successfully perform the contract, the surety assumes the contractor’s responsibilities and ensures that the project is completed. Surety bonds are viewed as a means to encourage project owners to contract with small businesses that may not have the credit history or prior experience of larger businesses and are considered to be at greater risk of failing to comply with the contract’s terms and conditions.

P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA), temporarily increased, from February 17, 2009, through September 30, 2010, the program’s bond limit to $5 million, and up to $10 million if a federal contracting officer certifies in writing that a guarantee in excess of $5 million is necessary. There have been several efforts during the 112th Congress to increase the program’s $2 million bond limit.

S. 1334, the Expanding Opportunities for Main Street Act of 2011, and its companion bill in the House, H.R. 2424, would reinstate and make permanent ARRA’s higher limits. S. 1660, the American Jobs Act of 2011, and its companion bill in the House, H.R. 12, would provide $3 million to temporarily increase the program’s bond limit to $5 million from $2 million until the end of FY2012. H.R. 4310, the National Defense Authorization Act for Fiscal Year 2013, which the House passed on May 18, 2012, would increase the program’s bond limit to $6.5 million, and up to $10 million if a federal contracting officer certifies that such a guarantee is necessary.

Advocates of raising the program’s bond limit argue that doing so would make it easier for small businesses to take advantage of contracting opportunities and bring the limit more in line with the limits of other small business programs, such as the 8(a) Minority Small Business and Capital Ownership Development Program and the Historically Underutilized Business Zone (HUBZone) Program. Opponents argue that raising the limit could lead to higher amounts being guaranteed by the SBA and, as a result, an increase in the risk of program losses.

This report examines the SBA’s Surety Bond Guarantee Program’s origin and development, including the decision to supplement the original Prior Approval Program with the Preferred Surety Bond Guarantee Program that provides a lower guarantee rate (70%) than the Prior Approval Program (80% or 90%) in exchange for allowing the preferred sureties to issue SBAguaranteed surety bonds without the SBA’s prior approval. It also examines the program’s eligibility standards and requirements, provides several performance statistics, and concludes with a discussion of proposals to increase the program’s $2 million bond limit and to merge the Prior Approval Program and the Preferred Surety Bond Guarantee Program while retaining the Preferred Program’s more flexible operating requirements.


Date of Report: June 5, 2012
Number of Pages: 31
Order Number: R42037
Price: $29.95

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