Payment bonds are required on public projects to ensure that subs and suppliers receive payment even when the general contractor has issues. Well, they may actually be present on private projects too, but that’s less common. In any event, a bond acts as insurance. If a sub or supplier goes unpaid, they can make a surety bond claim just as they would make a lien claim on a private project, but payment comes from the surety instead of a property sale.
For general contractors, obtaining surety bonds can be a lot like getting credit from a bank. As such, some businesses may struggle to obtain the appropriate bonding. Because bonding is required for government projects, this means that some businesses could be disqualified from public projects from the get-go. That’s why the U.S. Small Business Association (“SBA”) lends a helping hand.
Surety Bond Guarantee Program
The Surety Bond Guarantee Program makes life easier for small construction businesses. Through the program, the SBA partners with surety companies to partially guarantee bonds. This reduces the risk for surety bond providers, making it easier for small businesses to attain bonds and compete for public projects. Last month, two facets of the program were adjusted to further benefit small construction businesses.
Here’s the SBA’s press release on the changes to the Surety Bond Guarantee Program.
Preferred Surety Bond Guarantee Program
The Preferred Surety Bond Guarantee Program is a subset of the overall program that aids companies bidding on small contracts ($100,000 or less) and companies owned or controlled by socially or economically disadvantaged individuals, veterans, service disabled veterans, HUBZone, or 8(a) businesses. For those that qualify, the SBA will now guarantee 90% of the bond – previously, they guaranteed up to 70%. Since the vast majority of their bond will be guaranteed by the SBA, sureties will be more comfortable extending bonds to these businesses. The SBA’s fee for guaranteeing these bonds is 0.729% of the contract price, and the contractor will still be responsible for the bond’s premium (typically 1.5% to 3% of the contract).
Quick Bond Application
The SBA’s Quick Bond Application (or “QuickApp”) streamlines the process for obtaining surety bonds and relaxes the underwriting process. Previously, QuickApp was only available for bonds up to $250,000. Now, where available, contractors may utilize the QuickApp process for surety bonds up to $400,000.
Did we mention that surety bonds may get cheaper going forward?
For contractors, surety bonds act kind of like a threshold to public projects. If you can’t get bonding, you can’t win the project. That’s why it’s important to make sure bonds are available, especially for those already at a disadvantage. What’s more, if there’s a greater supply of capable, bonded contractors, the public could see tax dollars go a little further – if my old Econ professor is to be believed, more competition for these jobs should result in lower prices on public projects.
Take a look at our Construction Payment Resources for a state-by-state breakdown of construction payment laws.