SBA Surety Bond Guarantee Program
Robert Jay Dilger
Senior Specialist in American National Government
October 7, 2015
Congressional Research Service
7-5700
www.crs.gov
R42037
SBA Surety Bond Guarantee Program
Summary
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 small
businesses that cannot obtain surety bonds through regular commercial channels. The program
guarantees individual contracts of up to $6.5 million, and up to $10 million if a federal
contracting officer certifies that such a guarantee is necessary. The SBA’s guarantee ranges from
70% to 90% of the surety’s loss if a default occurs. In FY2014, the SBA guaranteed 12,384 bid
and final surety bonds with a total contract value of about $6.4 billion.
A surety bond is a three-party instrument between a surety (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 contract’s terms and conditions. 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. 112-239, the National Defense Authorization Act for Fiscal Year 2013, increased the
program’s bond limit, which had been $2 million since 2000, and was temporarily increased,
from February 17, 2009, through September 30, 2010, to $5 million, and up to $10 million if a
federal contracting officer certified in writing that a guarantee in excess of $5 million was
necessary. Advocates of raising the program’s bond limit argued that doing so would increase
contracting opportunities for small businesses and bring the limit more in line with 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 argued that raising the limit could lead to higher amounts being guaranteed by the
SBA and, as a result, increase the risk of program losses.
This report examines the program’s origin and development, including (1) the decision to
supplement the original Prior Approval Program with the Preferred Surety Bond Guarantee
Program that provides a lower guarantee rate (not to exceed 70%) than the Prior Approval
Program (not to exceed 80% or 90%, depending on the size of the contract and the type of small
business) in exchange for allowing preferred sureties to issue SBA-guaranteed surety bonds
without the SBA’s prior approval; (2) the conference agreement to H.R. 1735, the National
Defense Authorization Act for Fiscal Year 2016, which would increase the Preferred Surety Bond
Guarantee Program’s guarantee rate from not to exceed 70% to not to exceed 90% of losses
starting one year from enactment; and (3) the decision to increase the program’s bond limit.
This report also examines the program’s eligibility standards and requirements and provides
performance statistics.
Congressional Research Service
SBA Surety Bond Guarantee Program
Contents
Congressional Interest in Surety Bonds ......................................... Error! Bookmark not defined.
Legislative Origin ............................................................................................................................ 3
Initial Demand and Costs Exceed Expectations .............................................................................. 4
Rapid Growth Is Not Sustained ....................................................................................................... 8
The Preferred Surety Bond Guarantee Program ............................................................................ 10
Small Business Eligibility Standards and Program Requirements ................................................ 12
Surety Eligibility Standards and Program Requirements .............................................................. 14
Program Statistics .......................................................................................................................... 16
Congressional Issues: Bond Limits and Guarantee Rates ............................................................. 18
111th Congress: Bond Limits ................................................................................................... 18
112th Congress: Bond Limits ................................................................................................... 19
113th Congress: Guarantee Rates ............................................................................................. 21
114th Congress: Guarantee Rates ............................................................................................. 22
Congressional Issues: Program Structure ...................................................................................... 22
Concluding Observations .............................................................................................................. 23
Tables
Table 1. SBA Surety Bond Guarantees Revolving Fund Appropriations, FY1976-FY2015 ......... 7
Table 2. Number and Amount of SBA Guaranteed Bid Bonds and Final Bonds, FY2007-
FY2014 ....................................................................................................................................... 16
Table 3. Surety Bond Guarantee Program, Net Cash Flow, FY2007-FY2014 .............................. 17
Table A-1. SBA Surety Bond Guarantee Program Volume, Final Bonds, FY1971-FY2014 ........ 25
Table A-2. SBA Surety Bond Guarantee Program Volume,
Bid and Final Bonds Combined, FY2000-FY2014 .................................................................... 28
Appendixes
Appendix. SBA Surety Bond Guarantee Program Statistics ......................................................... 25
Contacts
Author Contact Information ........................................................... Error! Bookmark not defined.
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SBA Surety Bond Guarantee Program
Congressional Interest in Surety Bonds
The Small Business Administration (SBA) administers several programs to support small
businesses, including loan guaranty programs to enhance small business access to capital;
contracting programs to increase small business opportunities in securing federal contracts; direct
loan programs for businesses, homeowners, and renters to assist their recovery from natural
disasters; and small business management and technical assistance training programs to assist
business formation and expansion. Congressional interest in these programs has increased in
recent years, primarily because assisting small business is viewed as a means to enhance
economic growth.
The SBA’s Surety Bond Guarantee Program has been operational since April 1971.1 It is designed
to increase small business’ access to federal, state, and local government contracting, as well as
private-sector contracting, by guaranteeing “bid, performance, and payment bonds on contracts
… for small and emerging contractors who cannot obtain bonding through regular commercial
channels.”2 The program guarantees individual contracts of up to $6.5 million, and up to $10
million if a federal contracting officer certifies that such a guarantee is necessary. The SBA’s
guarantee ranges from 70% to 90% of the surety’s loss if a default occurs.
In FY2014, the SBA guaranteed 12,384 bid and final surety bonds (a payment bond, performance
bond, or both a payment and performance bond) with a total contract value of about $6.4 billion.3
Although the surety industry does not report the total value of the bonds it issues each year,
estimates based on the total amount of premiums collected by the private sector in recent years
suggest that the SBA’s Surety Bond Guarantee Program represents, by design, a relatively small
percentage of the market for surety bonds (from about 1.0% to 4.1% of the value of surety bonds
issued by the private sector).4
A surety bond is a three-party instrument between a surety (that 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 contract’s terms and conditions. If the contractor is unable to
successfully perform the contract, the surety assumes the contractor’s responsibilities and ensures
that the project is completed. The surety bond reduces the risk of contracting.5
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
1 P.L. 91-609, the Housing and Urban Development Act of 1970; and U.S. Congress, Senate Committee on Banking,
Housing, and Urban Affairs, Small Business Legislation - 1974, hearing on S. 3137 and S. 3138, 93rd Cong., 2nd sess.,
March 13, 1974 (Washington: GPO, 1974), p. 19.
2 U.S. Small Business Administration (SBA), “FY2016 Congressional Budget Justification and FY2014 Annual
Performance Report,” p. 44, at https://www.sba.gov/sites/default/files/1-
FY%202016%20CBJ%20FY%202014%20APR.PDF. An ancillary bond, which ensures that requirements integral to
the contract, but not directly performance related, are performed, is also eligible if it is incidental and essential to a
contract for which SBA has guaranteed a final bond. A reclamation bond is eligible if it is issued to reclaim an
abandoned mine site and for a project undertaken for a specific period of time.
3 SBA, Office of Congressional and Legislative Affairs, correspondence with the author, November 24, 2014.
4 Surety bonds range in price from 0.5% to 2% of the contract price. By dividing the total amount of premiums issued
each year by the private sector (about $3.0 billion annually in recent years) by .005 and .02 provides a range for the
value of those contracts ($150 billion to $600 billion). Premium data from Surety Information Office, “Contract Surety
Bonds, Understanding Today’s Market, 2013,” Washington, DC, at http://suretyinfo.org/?page_id=70&wpfb_cat=
3#wpfb-cat-3.
5 SBA, “Surety Bonds: The Basics,” at https://www.sba.gov/content/surety-bonds-basics.
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considered to be at greater risk of failing to comply with the contract’s terms and conditions.6 The
three general types of surety bonds are
bid bonds guarantee that the bidder on a contract will enter into the contract and
furnish the required payment and performance bonds if awarded the contract,
payment bonds guarantee that suppliers and subcontractors will be paid for work
performed under the contract, and
performance bonds guarantee that the contractor will perform the contract in
accordance with its terms and conditions.7
Surety bonds are important to small businesses interested in competing for a federal contract
because the federal government requires prime contractors, prior to the award of a federal
contract exceeding $150,000 for the construction, alteration, or repair of any building or public
work of the United States, to furnish a performance bond issued by a surety satisfactory to the
officer awarding the contract, and in an amount the contracting officer considers adequate, to
protect the government.8 Prime contractors are also required to post a payment bond with a surety
satisfactory to the contracting officer for the protection of all persons supplying labor and
material in carrying out the work provided for in the contract. Both bonds become legally binding
upon award of the contract and their “penal amounts,” or the maximum amount of the surety’s
obligation, must generally be 100% of the original contract price plus 100% of any price
increases.9 Most state and local governments have adopted similar legislation, often called “Little
Miller Acts,” referencing the Miller Act of 1935 that established the federal requirement.10 Many
private project owners also require contractors to furnish a surety bond before awarding them a
contract.
This report opens with an examination of the SBA’s Surety Bond Guarantee Program’s legislative
origin and provides a historical summary of the major issues that have influenced the program’s
development, including
the decision to supplement the original Prior Approval Program with a Preferred Surety
Bond Guarantee Program that provides SBA-approved sureties a lower guarantee rate
(not to exceed 70%) than those participating in the Prior Approval Program (not to
exceed 80% or 90%, depending on the size of the contract and the type of small business)
in exchange for allowing preferred sureties to issue SBA-guaranteed bonds to small
businesses without the SBA’s prior approval;
the conference agreement to H.R. 1735, the National Defense Authorization Act for
Fiscal Year 2016, which would increase the Preferred Surety Bond Guarantee Program’s
6 Ibid.
7 Ibid.
8 The threshold amount was originally set at $2,000 in 1935 under P.L. 74-321, An Act Requiring Contracts for the
Construction, Alteration, and Repair of Any Public Building or Public Work of the United States to be Accompanied
by a Performance Bond Protecting the United States and an Additional Bond for the Protection of Persons Furnishing
Material or Labor for the Construction, Alteration, or Repair of Said Public Buildings or Public Work [the Miller Act
of 1935], 49 Stat. 793 (August 24, 1935) (codified at 40 U.S.C. §3133(b)(1)). For further information and analysis of
federal requirements concerning surety bonds, see CRS Report R41230, Legal Protections for Subcontractors on
Federal Prime Contracts, by Kate M. Manuel.
9 Performance bonds may be less than 100% provided that the contracting officer determines that a smaller amount will
adequately protect the government. 40 U.S.C. §3133(b)(2).
10 SBA, “Standard Operating Procedure: Surety Bond Guarantee Program,” SOP 50 45 2, effective March 8, 1999, p. 7,
at https://www.sba.gov/sites/default/files/sops/sop5045.pdf.
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guarantee rate from not to exceed 70% to not to exceed 90% of losses starting one year
from enactment; and
the decision to increase the program’s bond limit.
It then examines the program’s current eligibility standards and requirements, and provides
performance statistics, including the number and amount of bond guarantees issued annually.
In addition, data concerning the number and amount of final bonds guaranteed from FY1971
through FY2014 (see Table A-1) and for bid and final bonds combined from FY2000 through
FY2014 (see Table A-2) are provided.
Legislative Origin
P.L. 91-609, the Housing and Urban Development Act of 1970, authorized the SBA’s Surety
Bond Guarantee Program.11 The act amended Title IV of the Small Business Investment Act of
1958 (P.L. 85-699, as amended) to provide the SBA authority to guarantee any surety against loss
as the result of a breach of the terms of a bid bond, payment bond, or performance bond by a
principal on any contract up to $500,000.12 The act specified that (1) the principal of the bond is a
small business, (2) the bond is required as a condition of bidding on the contract or serving as a
prime contractor or subcontractor on the project, (3) the small business is not able to obtain such
bond on reasonable terms and conditions without the guarantee, (4) the SBA determines that there
is a reasonable expectation that the small business will perform the covenants and conditions of
the contract, (5) the contact meets SBA requirements concerning the feasibility of the contract
being completed successfully and at a reasonable cost, and (6) the bond’s terms and conditions
are reasonable in light of the risks involved and the extent of the surety’s participation.13 The act
also required that the SBA’s guarantee not exceed 90% of the loss incurred by the surety in the
event of a breach of the bond’s terms and conditions by the small business.14
The SBA was authorized to finance the program through the Leasing Guarantee Revolving Loan
Fund within the Department of the Treasury, which renamed that fund the Lease and Surety Bond
Guarantee Revolving Fund. The act authorized the transfer of $5 million from the SBA’s Business
Loan and Investment Revolving Fund to the Lease and Surety Bond Guarantee Revolving Fund,
raising that fund’s capital to $10 million available without fiscal year limitation, to support both
the lease guarantee program and the surety bond guarantee program.15 The act also recommended
that the program be appropriated up to $1.5 million each fiscal year for three fiscal years after its
11 The SBA’s Surety Bond Guarantee Program was authorized in this particular act because the program, as introduced
in the House (H.R. 19436), would have been administered by the Department of Housing and Urban Development to
provide or guarantee surety bonds for construction contractors and subcontractors. The program’s administration was
shifted to the SBA in the conference agreement accompanying the bill. See U.S. Congress, House Committee of
Conference, Housing and Urban Development Act of 1970, report to accompany H.R. 19436, 91st Cong., 2nd sess.,
December 17, 1970, H.Rept. 91-1784 (Washington: GPO, 1970), p. 65.
12 P.L. 91-609, the Housing and Urban Development Act of 1970, §411. Authority of the Administration.
13 Ibid. At that time, the SBA considered contractors small if the company’s average annual receipts over three years
did not exceed $2 million, or $1 million for most special trade contractors. See U.S. Congress, Senate Select
Committee on Small Business, Surety Bond Guarantee Program of the Small Business Administration, 94th Cong., 1st
sess., November 19, 1975 (Washington: GPO, 1975), p. 14.
14 P.L. 91-609, the Housing and Urban Development Act of 1970, §411. Authority of the Administration.
15 U.S. Office of Management and Budget, Budget of the U.S. Government, FY1974: Appendix, Small Business
Administration, p. 944.
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date of enactment (December 31, 1970) if additional funding were needed to offset the program’s
expenses.16
The SBA was directed to administer the program “on a prudent and economically justifiable
basis.”17 It was authorized to offset the program’s administrative costs by charging a uniform
annual fee, subject to periodic review to ensure that the fee is the “lowest fee that experience
under the program shows to be justified,” and uniform fees for the processing of applications for
guarantees.18 The SBA also was authorized to “obligate the surety to pay the Administration such
portions of the bond fee as the Administration determines to be reasonable in light of the relative
risks and costs involved.”19
The program’s sponsors argued in 1970 that “there is widespread evidence that a significant
number of construction contracting organizations find varying degrees of difficulty in obtaining
surety bonds” and that “the major share of these organizations are small businesses, and many of
them are headed by minority groups.”20 They argued that the Surety Bond Guarantee Program
would “facilitate the entry and advancement of small and minority contractors in the construction
business.”21 At that time, witnesses at congressional hearings testified that surety bonds were not
necessarily required for most private sector construction contracts, but they were required for
most public sector construction contracts.22
Initial Demand and Costs Exceed Expectations
The SBA implemented the program on a pilot basis on April 5, 1971, in Kansas City. The
program later was expanded to Los Angeles and became nationwide on September 2, 1971.23
Initially, the SBA guaranteed 90% of the amount of all of the surety bonds in the program and
charged sureties 10% of the bond premium paid to the surety company by the contractor.24 It also
charged small business applicants for payment and performance bonds 0.2% of the contract price
upon their obtaining the contract. It did not charge for the processing of bid bonds, rejected
applications, or applications that did not result in a contract award.25 Contractors wishing to
participate in the program were required to have less than $750,000 in gross annual receipts for
16 P.L. 91-609, the Housing and Urban Development Act of 1970, §411. Authority of the Administration.
17 Ibid.
18 Ibid.
19 Ibid.
20 U.S. Congress, House Banking and Currency, Housing and Urban Development Legislation - 1970, 91st Cong., 2nd
sess., June 5, 1970 (Washington: GPO, 1970), p. 351.
21 Ibid.
22 U.S. Congress, House Committee on Small Business, Subcommittee on SBA Oversight and Minority Experience,
Selected Small Business Administration Programs and Activities, 94th Cong., 2nd sess., February 24, 1976, H. Rept. 94-
840 (Washington: GPO, 1976), p. 4.
23 U.S. Congress, Senate Committee on Banking, Housing, and Urban Affairs, Oversight of SBA Set-Aside, Lease
Guaranty, and Surety Bond Programs, 94th Cong., 2nd sess., March 8, 1976 (Washington: GPO, 1976), pp. 26, 28.
24 The SBA reported to the Government Accounting Office in 1975 that the surety bond industry initially insisted that
the SBA guarantee “90% of any loss for no more than 10% of the premiums collected” as a condition of participating
in the program. The SBA also reported that the industry indicated a willingness to “reassess the adequacy of SBA’s
10% share after two years of experience.” See U.S. General Accounting Office, Use Of Surety Bonds In Federal
Construction Should be Improved, LCD-74-319, January 17, 1975, p. 35, at http://www.gao.gov/assets/120/
114086.pdf.
25 U.S. Congress, Senate Select Committee on Small Business, Surety Bond Guarantee Program of the Small Business
Administration, 94th Cong., 1st sess., November 19, 1975 (Washington: GPO, 1975), p. 14.
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the past fiscal year or to have averaged less than $750,000 in gross annual receipts over the past
three fiscal years. This size standard was more stringent than for other SBA programs, and it was
designed “to reach that segment of small business which was obviously intended to benefit from
the legislation as evidenced by the limit of $500,000 on any one contract.”26
Demand for the program exceeded the SBA’s expectations. In 1971, the SBA estimated that it
would guarantee about 8,000 contracts amounting to about $540 million from FY1972 through
FY1974. Instead, it guaranteed 16,118 contracts amounting to nearly $1.1 billion (see Table A-1
in the Appendix).27 Because the demand for the program exceeded expectations and the initial
fees proved to be insufficient to recoup the program’s expenses, in 1974, the SBA requested an
additional $25 million for the program. The SBA argued that the additional funds were necessary
to take into account the program’s projected growth and to establish a reserve fund “to protect
against having to suspend [the] program in the fact of more rapid growth than is projected.”28
In response to the SBA’s request for additional funding for the program, Congress held
congressional hearings to reassess the need for the program and to explore options concerning
how to finance the program’s proposed expansion. The financing discussions focused on the
relative merits of relying primarily on higher fees to increase the program’s revenue, reductions in
the guarantee percentage to reduce the program’s expenses, or additional appropriations to
finance the program’s proposed expansion. Although the SBA has periodically increased the
program’s fees and later instituted a tiered system of guarantee percentages, historically, the SBA
has tried to keep the program’s fees as low as economically feasible and the guarantee percentage
as high as economically feasible to encourage the program’s use. As an SBA official testified
before Congress in 1975:
SBA’s loss exposure could be reduced by a decrease in the guarantee extended to sureties
from 90% to 80%. Before proceeding with this recommendation, a thorough analysis will
have to be made of the adverse effect on the willingness of sureties to participate in the
program which would result from the increase from 10% to 20% of the sureties’ share of
the loss potential.
An increase in contractor’s fees would obviously be beneficial to the operating income of
the program, but would also increase the bids which small business-contractors would
have to make, thus placing them at a competitive disadvantage with contractors with
more ready access to bonding.29
Moreover, as mentioned previously, the SBA is required by statute to ensure that the fees are the
lowest “that experience under the program shows to be justified.”30
26 U.S. Congress, Senate Select Committee on Small Business, Review of Small Business Administration’s Programs
and Policies - 1971, 92nd Cong., 1st sess., October 5, 1971 (Washington: GPO, 1971), p. 46.
27 U.S. Congress, Senate Committee on Banking, Housing, and Urban Affairs, Small Business Legislation - 1974,
hearing on S. 3137 and S. 3138, 93rd Cong., 2nd sess., March 13, 1974 (Washington: GPO, 1974), pp. 4, 19.
28 U.S. Congress, Senate Committee on Banking, Housing, and Urban Affairs, Small Business Legislation - 1974,
hearing on S. 3137 and S. 3138, 93rd Cong., 2nd sess., March 13, 1974 (Washington: GPO, 1974), p. 20. As of 1974, the
SBA reportedly took in $3 million in surety bond premiums and paid out more than $12 million in claims. See
Representative William Cotter, “Providing for Consideration of H.R. 15578, Small Business Amendments of 1974,”
House Debate, Congressional Record, vol. 120, part 20 (August 1, 1974), p. 26398.
29 Testimony of John T. Wettach, SBA Associate Administrator for Finance and Investment, in U.S. Congress, Senate
Select Committee on Small Business, Surety Bond Guarantee Program of the Small Business Administration, 94th
Cong., 1st sess., November 19, 1975 (Washington: GPO, 1975), p. 3.
30 P.L. 91-609, the Housing and Urban Development Act of 1970.
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Determining the program’s appropriate size became a recurring theme at congressional hearings,
and continues to be of congressional interest today. For example, Congress has regularly
requested testimony from representatives of the surety bond industry and various construction
organizations concerning the extent to which the program is necessary to assist small businesses
generally, and minority-owned small businesses in particular, in gaining access to surety bonds.
Congress has also periodically asked the Government Accountability Office (GAO) to examine
the need for the SBA’s surety bond guarantee program and to recommend ways to improve the
program’s management.31 That testimony and GAO’s reports have supported a need for the
program, but, as will be discussed, have had somewhat limited usefulness in helping Congress
determine the program’s appropriate size.
In 1974, Congress responded to the SBA’s request for additional funding by passing P.L. 93-386,
the Small Business Amendments of 1974. It established a separate Surety Bond Guarantees
Revolving Fund account (hereafter Revolving Fund) within the Department of the Treasury to
support the program. The act also increased the total contract amount that could be guaranteed to
$1 million from $500,000 and recommended that the Revolving Fund receive $35 million in
additional funding.32
The Ford Administration objected to providing additional appropriations for the Revolving Fund.
Instead, the Administration recommended that the Revolving Fund receive a $20 million transfer
from the SBA’s Business Loan and Investment Revolving Fund. The transfer would provide the
program access to additional capital without affecting the federal budget deficit. Congress
approved the Administration’s proposal.33
As shown on Table 1, Congress subsequently approved appropriations totaling $130.5 million for
the Revolving Fund in FY1976 through FY1979. Congress also provided additional
appropriations to the Revolving Fund during the 1980s and 1990s and increased the program’s
bond limit to $1.25 million from $1 million in 1986, but as will be discussed, the appropriation
and increase in the bond limit were not sufficient to continue the program’s growth.34 Instead,
both in terms of the number and amount of final surety bonds guaranteed by the SBA, the
program began to slowly diminish. This general trend continued until the maximum individual
surety contract amount was increased, first on a temporary basis by P.L. 111-5, the American
Recovery and Reinvestment Act of 2009, and later, on a permanent statutory basis, by P.L. 112-
239, the National Defense Authorization Act for Fiscal Year 2013.35
31 U.S. General Accounting Office, Use Of Surety Bonds In Federal Construction Should be Improved, LCD-74-319,
January 17, 1975, at http://www.gao.gov/assets/120/114086.pdf; U.S. General Accounting Office, The Surety Bond
Guarantee Program: Significant Changes Are Needed In Its Management, CED-80-34, December 27, 1979, at
http://www.gao.gov/assets/130/128788.pdf; U.S. General Accounting Office, Surety Bond Guarantee Program: Small
Business Administration’s Actions on Prior Program Recommendations, GAO/RCED-86-183BR, September 18, 1986,
at http://www.gao.gov/assets/80/75929.pdf; U.S. General Accounting Office, Small Business: Information on and
Improvements Needed to Surety Bond Guarantee Programs, GAO/RCED-91-99, April 23, 1991, at
http://www.gao.gov/assets/160/150521.pdf; U.S. General Accounting Office, Small Business: Construction Firms’
Access to Surety Bonds, GAO/RCED-95-173FS, June 26, 1995, at http://www.gao.gov/assets/230/221330.pdf; and U.S.
General Accounting Office, Minority-Owned Firms’ Access to Surety Bonds, GAO/RCED-95244R, July 14, 1995, at
http://www.gao.gov/assets/90/84702.pdf.
32 P.L. 93-386, the Small Business Amendments of 1974, §411. Authority of the Administration.
33 S.Doc. 93-116, Supplemental Appropriations for FY75 for Department of Commerce and Small Business
Administration, Communication from the President, October 2, 1974; and P.L. 93-554, the Supplemental
Appropriations Act, 1975.
34 P.L. 99-272, the Consolidated Omnibus Budget Reconciliation Act of 1985.
35 SBA, “Much Higher Surety Bond Guarantee Ceilings Enable Small Businesses to Bid on Larger Contracts and
(continued...)
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As shown in Table 1, Congress did not appropriate funding for the Revolving Fund from FY2000
to FY2004, allowing the program to cover the cost of claim defaults through its reserve. Congress
also increased the program’s bond limit to $2 million from $1.25 million in 2000.36
Table 1. SBA Surety Bond Guarantees Revolving Fund Appropriations,
FY1976-FY2016
($ in millions)
Fiscal Year
Appropriation
Fiscal Year
Appropriation
Fiscal Year
Appropriation
1976
$12.500
1990
$11.000
2004
$0.000
1977
$36.000
1991
$10.200
2005
$2.900
1978
$47.000
1992
$14.600
2006
$2.861
1979
$35.000
1993
$13.020
2007
$2.861
1980
$0.000
1994
$7.000
2008
$3.000
1981
$0.000
1995
$5.369
2009
$17.000
1982
$19.000
1996
$2.530
2010
$1.000
1983
$0.000
1997
$3.730
2011
$0.000
1984
$8.910
1998
$3.500
2012
$0.000
1985
$8.910
1999
$3.300
2013
$0.000
1986
$7.000
2000
$0.000
2014
$0.000
1987
$9.497
2001
$0.000
2015
$0.000
1988
$9.497
2002
$0.000
2016
$0.000
1989
$9.497
2003
$0.000
Sources: P.L. 94-121, the Department of State, Justice, and Commerce, the Judiciary, and Related Agencies
Appropriation Act, 1976; P.L. 94-362, the Departments of State, Justice, and Commerce, the Judiciary, and
Related Agencies Appropriation Act, 1977; P.L. 95-86, the Departments of State, Justice, and Commerce, the
Judiciary, and Related Agencies Appropriation Act, 1978; P.L. 95-431, the Departments of State, Justice, and
Commerce, the Judiciary, and Related Agencies Appropriation Act, 1979; P.L. 97-92, A joint resolution making
further continuing appropriations for the fiscal year 1982, and for other purposes; P.L. 98-166, the Departments
of Commerce, Justice, and State, the Judiciary, and Related Agencies Appropriation Act, 1984; P.L. 98-411, the
Departments of Commerce, Justice, and State, the Judiciary, and Related Agencies Appropriation Act, 1985; P.L.
99-180, the Departments of Commerce, Justice, and State, the Judiciary, and Related Agencies Appropriation
Act, 1986; P.L. 99-591, A joint resolution making continuing appropriations for the fiscal year 1987, and for other
purposes; P.L. 100-202; A joint resolution making further continuing appropriations for the fiscal year 1988, and
for other purposes; P.L. 100-459, the Departments of Commerce, Justice, and State, the Judiciary, and Related
Agencies Appropriations Act, 1989; P.L. 101-162, the Departments of Commerce, Justice, and State, the
Judiciary, and Related Agencies Appropriations Act, 1990; P.L. 101-515, the Departments of Commerce, Justice,
and State, the Judiciary, and Related Agencies Appropriations Act, 1991; P.L. 102-140, the Departments of
Commerce, Justice, and State, the Judiciary, and Related Agencies Appropriations Act, 1992; P.L. 102-395, the
Departments of Commerce, Justice, and State, the Judiciary, and Related Agencies Appropriations Act, 1993; P.L.
103-121, the Departments of Commerce, Justice, and State, the Judiciary, and Related Agencies Appropriations
Act, 1994; P.L. 103-317, the Departments of Commerce, Justice, and State, the Judiciary and Related Agencies
(...continued)
Grow,” February 6, 2013, at https://www.sba.gov/blogs/much-higher-surety-bond-guarantee-ceilings-enable-small-
businesses-bid-larger-contracts-and; and SBA, “Surety Bond Guarantee Program,” 78 Federal Register 46528-46532,
August 1, 2013.
36 P.L. 106-554, the Consolidated Appropriations Act, 2001.
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Appropriations Act, 1995; P.L. 104-134, the Omnibus Consolidated Rescissions and Appropriations Act of 1996;
P.L. 104-208, the Omnibus Consolidated Appropriations Act, 1997; P.L. 105-119, the Departments of
Commerce, Justice, and State, the Judiciary, and Related Agencies Appropriations Act, 1998; P.L. 105-277, the
Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999; P.L. 108-447, the Consolidated
Appropriations Act, 2005; P.L. 109-108, the Science, State, Justice, Commerce, and Related Agencies
Appropriations Act, 2006; P.L. 109-289, Making Appropriations for the Department of Defense for the fiscal year
ending September 30, 2007, and for other purposes; P.L. 110-161, the Consolidated Appropriations Act, 2008;
P.L. 111-5, the American Recovery and Reinvestment Act of 2009; P.L. 111-8, the Omnibus Appropriations Act,
2009; P.L. 111-117, the Consolidated Appropriations Act, 2010; P.L. 112-10, the Department of Defense and
Ful -Year Continuing Appropriations Act, 2011; P.L. 112-74, the Consolidated Appropriations Act, 2012; P.L.
112-175, the Continuing Appropriations Resolution, 2013; P.L. 113-6, the Consolidated and Further Continuing
Appropriations Act, 2013; P.L. 113-164, the Continuing Appropriations Resolution, 2015; and P.L. 114-53, the
Continuing Appropriations Act, 2016.
Congress provided the Revolving Fund $2.9 million in FY2005, $2.86 million in FY2006, $2.86
million in FY2007, and $3.0 million in FY2008. During the 111th Congress, P.L. 111-5 provided
the Revolving Fund a separate appropriation of $15 million to support a temporary increase in the
program’s bond limit to $5 million, and up to $10 million if a federal contracting officer certified
in writing that a guarantee in excess of $5 million was necessary, from $2 million. Those funds
were in addition to the $2 million appropriation that had already been approved for FY2009.
In FY2010, the Revolving Fund received $1 million. Congress has not approved appropriations
for the Revolving Fund since then, noting that there have been sufficient funds in the program’s
reserve to cover the cost of anticipated claim defaults.37
As mentioned previously, the SBA relied primarily on increased appropriations to finance the
program’s expansion during the 1970s, but it also increased the program’s fees charged to
applicants and sureties. For example, in 1976, the SBA increased its fees to sureties to 20% from
10% of the bond premium, instituted a deductible clause on bond claims, and generally limited its
approval for bid, participation, and performance bonds to $250,000 unless specified
circumstances were met.38 In 1977, it increased the contractor applicant fee for payment and
performance bonds to 0.5% from 0.2% of the contract price upon obtaining the contract.39 The
program’s current fee structure is discussed later in this report.
Rapid Growth Is Not Sustained
Both the number and amount of final surety bonds guaranteed by the SBA increased relatively
rapidly during the 1970s (see Table A-1 in the Appendix). The number of final surety bonds
guaranteed by the SBA increased from 1,339 in FY1972 to 20,095 in FY1979, and the amount
guaranteed by the SBA increased from $94.4 million in FY1972 to $1.39 billion in FY1979.
During the 1980s and 1990s, both the number and amount of final surety bonds guaranteed by the
SBA generally declined, in both nominal and inflation-adjusted dollars. A review of congressional
testimony during that period suggests that there was no single, discernible factor to account for
37 U.S. Office of Management and Budget, Budget of the U.S. Government, FY2012: Appendix, Small Business
Administration, p. 1163; U.S. Congress, House Committee on Small Business, Views and Estimates of the Committee
on Small Business on Matters to be set forth in the Concurrent Resolution on the Budget for Fiscal Year 2012, 112th
Cong., 1st sess., March 17, 2011 (Washington: GPO, 2011), pp. 5, 6, at http://smbiz.house.gov/UploadedFiles/
March_17_Views_and_Estimates_Letter.pdf; and U.S. Office of Management and Budget, Budget of the United States
Government: FY2014: Appendix: Small Business Administration, p. 1177.
38 SBA, “Title 13 Business Credit and Assistance, Chapter 1 Small Business Administration, Part 115 - Surety Bond
Guarantee Policy and Guarantee Fees,” 41 Federal Register 16549-16550, April 20, 1976.
39 SBA, “Guarantee Fees,” 42 Federal Register 9397, February 16, 1977.
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the program’s slow contraction. Because the demand for surety bonds tends to fluctuate with
changes in the economy, the program might have been expected to contract somewhat during
recessions, but the economy experienced periods of both economic growth and decline during the
1980s and 1990s. There also was no indication that the ability of small businesses to access surety
bonds in the private marketplace without the SBA’s assistance had materially improved, which, if
that had been the case, might have contributed to the decline by reducing the number of small
businesses applying for assistance.
One possible contributing factor to the decline in SBA-guaranteed surety bonds during that period
was the continuing reluctance of many surety companies to participate in the program, either
because they did not view the program as particularly profitable or they “had developed
alternative methods to the program, such as requiring collateral or funds controls and
underwriting programs based in part on credit scores, in order to write small and emerging
contractors.”40 Another possible contributing factor was a change in the way the program was
perceived by congressional leaders and their reluctance to provide additional resources to
continue the program’s expansion.
During the 1970s, at congressional hearings, witnesses praised the program as a great success in
helping small businesses access surety bonds and compete for government contracts. During the
1980s and 1990s, congressional hearings focused less on the program’s successes and more on its
shortcomings. For example, in 1982, the chair of the Senate Committee on Small Business
indicted that the program was subject to “the most insidious types of fraud,” including “evidence
of involvement of organized crime figures.”41 In addition, reports by both GAO and the SBA’s
inspector general questioned the SBA’s management of the program, arguing, among other things,
that the SBA lacked useful underwriting guidelines for surety companies and adequate procedures
for verifying applicants’ information.42
During the 1980s, the SBA guaranteed, on average, 11,840 final surety bonds each fiscal year,
with the SBA’s share of those bonds’ value averaging $1.0 billion. During the 1990s, the SBA
guaranteed, on average, 5,859 final surety bonds each fiscal year, with the SBA’s share of those
bonds’ value averaging $823 million. During the first decade of the 2000s, the SBA guaranteed,
on average, about 1,802 final surety bonds each fiscal year, with the SBA’s share of those bonds’
value averaging about $385 million.43
40 U.S. Congress, House Committee on Small Business, Full Committee Hearing on Legislation Updating and
Improving the SBA’s Investment and Surety Bond Programs, 110th Cong., 1st sess., September 6, 2007, Serial No. 110-
44 (Washington: GPO, 2007), p. 64.
41 U.S. Congress, Senate Committee on Small Business, Small Business Administration’s Surety Bond Guarantee
Program, 97th Cong., 2nd sess., March 11, 1982 (Washington: GPO, 1982), pp. 1, 257, 258.
42 U.S. General Accounting Office, The Surety Bond Guarantee Program: Significant Changes Are Needed In Its
Management, CED-80-34, December 27, 1979, at http://www.gao.gov/assets/130/128788.pdf; U.S. General
Accounting Office, Surety Bond Guarantee Program: Small Business Administration’s Actions on Prior Program
Recommendations, GAO/RCED-86-183BR, September 18, 1986, at http://www.gao.gov/assets/80/75929.pdf; U.S.
General Accounting Office, Small Business: Information on and Improvements Needed to Surety Bond Guarantee
Programs, GAO/RCED-91-99, April 23, 1991, at http://www.gao.gov/assets/160/150521.pdf; U.S. Congress, House
Committee on Small Business, Subcommittee on Procurement, Exports and Business Opportunities, Small Business
Administration’s Surety Bond Guarantee Program, 104th Cong., 1st sess., April 5, 1995, Serial No. 104-24
(Washington: GPO, 1995), pp. 252-307.
43 SBA, “FY2003 Budget Request and Performance Plan,” pp. 17, 19; SBA, “SBA Budget Request & Performance
Plan, FY2004,” pp. 3, 4; SBA, “Congressional Submission Fiscal Year 2005,” p. 15; SBA, “Congressional Submission
Fiscal Year 2006,” pp. 19, 78; SBA, “FY2007 Congressional Budget Request and Performance Plan,” pp. 25, 71; SBA,
“FY2009 Congressional Budget Justification and FY207 Annual Performance Report,” p. 65; SBA, “Fiscal Year 2010
Congressional Budget Justification,” p. 46, at https://www.sba.gov/sites/default/files/aboutsbaarticle/
(continued...)
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Since then, as indicated in
Table 2 and Table A-1, the number and amount of final surety bonds guaranteed by the SBA has
generally increased. This increase is likely due to generally improving economic conditions and
the increase in 2013 of the maximum individual contract amount that could be guaranteed from
$2.0 million to $6.5 million, and up to $10 million if a federal contracting officer certifies that
such a guarantee is necessary.
The Preferred Surety Bond Guarantee Program
The surety bonding process begins when a contractor applies for a bond. As GAO has reported
Surety companies are generally corporations that are licensed under various insurance
laws and, under their charters, have legal power to act as a surety (making themselves
responsible for another’s obligations) for others. Most surety companies accept business
only through independent agents and brokers. In screening a bond applicant, a surety
attempts to measure the contractor’s ability to undertake and complete the job. When the
surety’s evaluation of the contractor’s acceptability to perform the contract is favorable,
the surety underwrites the bond. If the surety does not provide a bond to the bond
applicant, the appropriate forms are forwarded to SBA for consideration of a surety bond
guarantee.44
Initially, the SBA surety guaranteed program’s bonds were underwritten and issued by large,
“standard” surety companies. However, these companies’ participation in the program soon began
to decline, reportedly because of the administrative burdens associated with the program, such as
the SBA’s requirement that sureties submit all bond applications to the SBA for review and
approval.45 In addition, the administrative costs of dealing with relatively small bonds versus
relatively large ones may have also played a role in the larger, standard surety companies leaving
the program. As a congressional witness testified in 1976:
You have a professional underwriter, who ... is going to be asked to spend 3 or 4 days
looking into a $25,000 first-time application. There are many expenses involved. That
same underwriter could very easily be writing four or five bonds for $10 million for
contractors that everyone knows can perform. And it becomes a matter of how much time
and resources can the surety industry devote to this type of business.46
Another reason may have been the outbreak of the Israeli-Egyptian War in 1973, which was
followed by a tripling of oil prices and double-digit inflation. This led to the failure of many
smaller contracting companies. In response to the economic downturn, many surety companies
enhanced their underwriting standards to protect themselves from rising defaults. As a result,
(...continued)
Congressional_Budget_Justification_2010.pdf; SBA, “FY2011 Congressional Budget Justification and FY2009 Annual
Performance Report,” p. 46, at https://www.sba.gov/sites/default/files/aboutsbaarticle/
Congressional_Budget_Justification.pdf; and SBA, Office of Congressional and Legislative Affairs, correspondence
with the author, on September 29, 2011, and December 5, 2013.
44 U.S. General Accounting Office, Small Business: Information on and Improvements Needed to Surety Bond
Guarantee Programs, GAO/RCED-91-99, April 23, 1991, p. 10, at http://www.gao.gov/assets/160/150521.pdf.
45 Ibid., p. 11; U.S. Congress, Senate Select Committee on Small Business, SBA Surety Bond Guarantee Program, 96th
Cong., 2nd sess., June 30, 1980 (Washington: GPO, 1980), p. 24; and S.Rept. 100-416, Small Business Administration
Reauthorization and Amendments Act of 1988, p. 24.
46 U.S. Congress, Senate Select Committee on Small Business, Surety Bond and Lease Guarantee Programs of the
Small Business Administration, 94th Cong., 2nd sess., May 7, 1976 (Washington: GPO, 1976), pp. 15, 16.
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many of the larger surety companies became increasingly reluctant to participate in a program in
which the profit margins were relatively small given the required paperwork and the program’s
limitation on the bond amount, and when the risk of defaults was at a historically high level.47
As standard sureties left the program, “specialty” surety companies filled the void. Initially,
specialty sureties devoted almost all their business exclusively to SBA-guaranteed surety bonds.48
These companies later expanded their business into offering other high-risk bonds not normally
handled by standard sureties. Specialty sureties typically required the contractor to provide
collateral for the projects they bonded, and, in most cases, charged higher premiums than
standard sureties.49
In 1982, the SBA invited officials from the Surety Association of America, representing the
standard surety companies, to recommend ways to encourage their participation in the program.50
As mentioned previously, at that time, some specialty surety companies had been accused of
associating with organized crime and GAO and the SBA’s inspector general had reported fraud
and mismanagement in the program. This may help to explain why the SBA was interested in
encouraging the larger, more established surety companies to return to the program. The SBA also
hoped that greater participation by the larger sureties would lead to lower premiums for small
business contractors.
During this outreach period, standard surety companies indicated a willingness to increase their
participation in the program if the SBA would create a second special program, similar to the
SBA’s 7(a) loan guarantee program’s Preferred Lenders Program.51 Under the proposal, a surety
meeting specified qualification standards would be designed as a “preferred surety” and would be
allowed to issue SBA-guaranteed surety bonds prior to receiving the SBA’s approval. To
participate in the preferred program, the surety’s underwriting and administrative standards and
procedures would be pre-approved by the SBA, and the surety’s decisions would be subject to
regular, annual audits. In addition, the SBA’s reporting and access to records requirements would
be retained. As a measure of their confidence in their own underwriting standards and claims
decisions, the standard surety firms indicated that they would accept a 70% guarantee against
losses as opposed to the then-allowed 80% or 90% guarantee against losses, as long as firms
would not be required to seek the SBA’ prior approval for underwriting decisions, bond
administration, and claims procedures.52
Congress subsequently authorized the proposed Preferred Surety Bond Guarantee Program in P.L.
100-590, the Small Business Administration Reauthorization and Amendment Act of 1988 (Title
II, the Preferred Surety Bond Guarantee Program Act of 1988). The program was initially
47 U.S. Congress, House Committee on Small Business, Subcommittee on SBA and SBIC Authority, Minority
Enterprise, and General Small Business, Surety Bond Guarantee Program, 98th Cong., 1st sess., May 17, 1983
(Washington: GPO, 1983), p. 58.
48 U.S. General Accounting Office, Small Business: Information on and Improvements Needed to Surety Bond
Guarantee Programs, GAO/RCED-91-99, April 23, 1991, p. 10, at http://www.gao.gov/assets/160/150521.pdf.
49 Ibid., pp. 11, 12.
50 S.Rept. 100-416, Small Business Administration Reauthorization and Amendments Act of 1988, p. 24; and U.S.
Congress, Senate Committee on Small Business, S. 2259, The Preferred Surety Bond Guarantee Program Act of 1988,
100th Cong., 2nd sess., April 12, 1988, S.Hrg. 100-692 (Washington: GPO, 1988), pp. 2, 101, 103, 125-127.
51 For information concerning the Preferred Lenders Program, see CRS Report R41146, Small Business Administration
7(a) Loan Guaranty Program, by Robert Jay Dilger.
52 U.S. General Accounting Office, Small Business: Information on and Improvements Needed to Surety Bond
Guarantee Programs, GAO/RCED-91-99, April 23, 1991, p. 12, at http://www.gao.gov/assets/160/150521.pdf; and
S.Rept. 100-416, Small Business Administration Reauthorization and Amendments Act of 1988, pp. 24-25.
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authorized on a three-year trial basis, and it was provided permanent statutory authority by P.L.
108-447, the Consolidated Appropriations Act, 2005.
As discussed in “114th Congress: Guarantee Rates” below, the conference agreement for H.R.
1735, the National Defense Authorization Act for Fiscal Year 2016, includes a provision that
would increase the SBA’s guarantee for preferred sureties from not less than 70% to not less than
90% of losses starting one year from enactment.
Small Business Eligibility Standards and
Program Requirements
The SBA is authorized to guarantee surety bonds issued to contractors or subcontractors when
the business, together with its affiliates, meets the SBA’s size standard for the
primary industry in which it is engaged;53
the bond is required;
the applicant is not able to obtain such bond on reasonable terms and conditions
without a guarantee; and
there is a reasonable expectation that the applicant will perform the covenants
and conditions of the contract, and the terms and conditions of the bond are
reasonable in light of the risks involved and the extent of the surety’s
participation.54
The applicant must also “possess good character and reputation,” as demonstrated by (1) not
being under indictment, being convicted of a felony, or having a final civil judgment stating that
the applicant has committed a breach of trust or has violated a law or regulation protecting the
integrity of business transactions or business relationships; (2) not having a regulatory authority
revoke, cancel, or suspend a license held by the applicant, which is necessary to perform the
contract; and (3) never having obtained a bond guarantee by fraud or material misrepresentation
or failing to keep the surety informed of unbonded contracts or of a contract bonded by another
surety.55
Applicants must also certify the percentage of work under the contract to be subcontracted. The
SBA does not guarantee bonds for applicants that are primarily brokers or have effectively
transferred control over the project to one or more subcontractors.56 Applicants must also certify
that they are not presently debarred, suspended, proposed for debarment, declared ineligible, or
voluntarily excluded from transactions with any federal department or agency.57 In addition, the
SBA will not guarantee a bond issued by a particular surety if that surety, an affiliate of that
53 SBA, “Surety Bond Guarantee Program; Size Standards,” 76 Federal Register 48549, August 11, 2010. In addition,
for any contract or subcontract, public or private, to be performed in the Presidentially-declared disaster areas resulting
from the 2005 Hurricanes Katrina, Rita or Wilma, a construction (general or special trade) concern or concern
performing a contract for services is small if it meets the size standard set forth in paragraph (d)(1) of this section, or
the average annual receipts of the concern, together with its affiliates, do not exceed $7.0 million, whichever is higher.
13 C.F.R. §121.301(d)(2).
54 15 U.S.C. §694b(a)(4).
55 13 C.F.R. §115.13(a)(2).
56 13 C.F.R. §115.13(a)(5).
57 13 C.F.R. §115.13(a)(6).
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surety, or a close relative or member of the household of that surety or affiliate owns, directly or
indirectly, 10% or more of the business applying for the guarantee. This conflict of interest
prohibition also applies to ownership interests in any of the applicant’s affiliates.58
As mentioned previously, the SBA guarantees contracts up to $6.5 million, and up to $10 million
if a federal contracting officer certifies that such a guarantee is necessary.59 There is no limit to
the number of bonds that can be guaranteed for any one contractor.
Under the Preferred Surety Bond Guarantee Program, the SBA may guarantee up to 70% of the
loss incurred and paid by a surety.60 Under the SBA’s original Prior Approval Program, the SBA
may guarantee up to 90% of the loss incurred if the contract is $100,000 or less, or if the bond
was issued on behalf of a socially and economically disadvantaged-owned and controlled small
business, a qualified HUBZone small business, a veteran-owned and controlled small business, or
a service-disabled veteran-owned and controlled small business. The guarantee rate is 80% under
the Prior Approval Program if the contract is greater than $100,000, and the business is not owned
and controlled by socially and economically disadvantaged individuals, a qualified HUBZone
small business, a veteran-owned or a service-disabled veteran-owned small business.61
The SBA does not charge principals (small business applicants) application or bid bond guarantee
fees. If the SBA guarantees a final bond, the principal must pay a guarantee fee equal to a
percentage of the contract amount, which is determined by the SBA and published in the Federal
Register.62 The current rate is 0.729% of the contract price for a final bond.63 The principal’s fee
is rounded to the nearest dollar, paid to the surety, and the surety remits the fee to the SBA.64
Sureties also charge principals a premium for issuing and servicing the bond. Sureties are not
allowed to charge principals a premium that is more than the amount permitted under applicable
58 13 C.F.R. §115.13(a)(6)(b).
59 Prior to enactment of P.L. 112-239, which increased the surety bond limit from $2 million, P.L. 110-246, the Food,
Conservation, and Energy Act of 2008, §12079. Small Business Bonding Threshold, had provided the SBA authority,
provided that funding was appropriated for this purpose, to guarantee within specified time frames (typically within 12
months following a major disaster declaration) contracts up to $5 million for non-federal contracts or orders if the
product will be manufactured or the services will be performed in a major disaster area as identified in the Federal
Emergency Management Administration’s (FEMA’s) website; and up to $5 million for federal contracts or orders
under those circumstances or if the products will be manufactured or the services will be provided outside the major
disaster area and the products or services will directly assist in the recovery efforts in the major disaster area. The SBA
was also authorized to issue a guarantee of up to $10 million on a federal contract if the contract meets any of the
conditions above and is requested by the head of the agency involved in disaster reconstruction efforts. See SBA,
“Surety Bond Guarantee Program; Disaster and Miscellaneous Amendments,” 76 Federal Register 2571, January 14,
2011.
60 13 C.F.R. §115.68.
61 13 C.F.R. §115.31. Under the Prior Approval Program, if the contract amount increases to more than $100,000 after
execution of the bond, the guarantee percentage decreases by one percentage point for each $5,000 of increase or part
thereof, but it does not decrease below 80%. If the contact or order is increased above the statutory limit after execution
of the bond, the SBA’s share of the loss is limited to that percentage of the increased contract or order amount that the
applicable statutory limit represents multiplied by the guarantee percentage approved by the SBA. For example, if a
contract amount increases to $2.1 million, the SBA’s share of the loss under an 80% guarantee is limited to 76.1%
[2,000,000/2,100,000=95.2%X80%=76.1%]. If the contract or order amount decreases to $100,000, or less, after
execution of the bond, the SBA’s guarantee increases to 90% if the surety provides the SBA with evidence supporting
the decrease.
62 C.F.R. §115.32.
63 SBA, “Surety Bond Guarantee Program Fee,” 76 Federal Register 9632, February 24, 2006; and SBA, “Surety
Bonds: The Basics,” at https://www.sba.gov/content/surety-bonds-basics.
64 13 C.F.R. §115.32.
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state law.65 Premiums vary depending on the surety’s assessment of the risk involved and job size;
typically ranging from 1.5% to 3.0% of the contract amount.66
Surety Eligibility Standards and
Program Requirements
Sureties interested in participating in the Prior Approval Program or the Preferred Surety Bond
Guarantee Program must apply in writing to the SBA. Applicants must be a corporation listed by
the U.S. Treasury as eligible to issue bonds in connection with federal procurement contracts.67
The SBA considers several factors when evaluating sureties for the Preferred Surety Bond
Guarantee Program:
the surety must have an underwriting limitation of at least $2 million on the U.S.
Treasury Department’s list of acceptable sureties;
the surety must agree that it will neither charge a bond premium in excess of that
authorized by the appropriate state insurance department nor impose any non-
premium fee unless such fee is permitted by applicable state law and approved by
the SBA;
the surety’s premium income from contract bonds guaranteed by any government
agency (federal, state, or local) can account for no more than one-quarter of the
surety’s total contract bond premium income; and
the surety must vest the underwriting authority for SBA guaranteed bonds to its
own employees and final settlement authority for claims and recovery to
employees in the surety’s permanent claims department.68
The SBA also considers the surety’s rating or ranking designation assigned by a recognized
authority.69 Sureties participating in the Preferred Surety Bond Guarantee Program are not eligible
to participate in the Prior Approval Program. However, this prohibition does not apply to the
surety’s affiliates provided that the affiliate is not a participant in the Preferred Program, their
affiliation has been fully disclosed to the SBA, and the affiliate has been approved to participate
in the Prior Approval Program.70
In the Prior Approval Program, the surety must obtain the SBA’s approval before issuing a
guaranteed bond. Sureties participating in the Preferred Surety Bond Guarantee Program may
issue, monitor, and service SBA-guaranteed bonds without prior approval.71 However, sureties in
the Preferred Program must notify the SBA electronically of all bonds issued and, for final bonds,
the surety must report and submit to the SBA on a monthly basis all contractor and surety fees
65 SBA, “Surety Bond Guarantee Program-Preferred Surety Qualification, Increased Guarantee for Veteran and
Service-Disabled Veteran-Owned Business,” 72 Federal Register 34598, June 25, 2007.
66 SBA, “Surety Bond Guarantee Program for Small Businesses,” at http://suretylearn.org/materials/presentations/.
67 13 C.F.R. §115.11.
68 13 C.F.R. §115.60.
69 Ibid.
70 13 C.F.R. §115.62.
71 13 C.F.R. §115.12.
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that are due.72 These sureties are also subject to a periodic maximum guarantee authority amount
set by the SBA.73
The terms and conditions of the SBA’s bond guarantee agreements with the surety, including the
guarantee percentage, may vary from surety to surety, depending on past experience with the
SBA. The SBA may take into consideration, among other things, the rating or ranking assigned to
the surety by recognized authorities, the surety’s loss rate, average contract amount, average bond
penalty per guaranteed bond, and the ratio of bid bonds to final bonds, all in comparison with
other sureties participating in the same SBA Surety Bond Guarantee Program (Prior Approval
Program or Preferred Surety Bond Guarantee Program).74
Sureties are required, among other things, to
evaluate the credit, capacity, and character of a principal using standards
generally accepted by the surety industry and in accordance with the SBA’s
standard operating procedures on underwriting and the surety’s principles and
practices on unguaranteed bonds;
reasonably expect that the principal will successfully perform the contract to be
bonded;
provide bond terms and conditions that are reasonable in light of the risks
involved and the extent of the surety’s participation;
be satisfied as to the reasonableness of cost and the feasibility of successful
completion of the contract;
ensure that the principal remains viable and eligible for the program;
monitor the principal’s progress on guaranteed contracts; and
maintain documentation of job status requests;
take all reasonable action to minimize risk of loss, including, but not limited to,
obtaining from each principal a written indemnity agreement, secured by such
collateral as the surety or the SBA finds appropriate, which covers actual losses
under the contract and imminent breach payments; and
in the case of loss, pursue all possible sources of salvage and recovery.75
Participating sureties are subject to audits by SBA-selected and -approved examiners. Prior
Approval Program sureties are audited at least once each year and Preferred Surety Bond
Guarantee Program sureties are audited at least once every three years.76
The SBA does not charge sureties (or small businesses) application or bid bond guarantee fees. It
does require sureties to pay a guarantee fee on each SBA-guaranteed bond (other than bid bonds).
The guarantee fee, which is determined by the SBA and published in the Federal Register, is a
72 SBA, “Surety Bonds: For Surety Companies and Agents,” at https://www.sba.gov/content/bond-guarantee-
application-surety-companyagent.
73 13 C.F.R. §115.63.
74 13 C.F.R. §115.12.
75 13 C.F.R. §115.15; and 13 C.F.R. §115.17. Imminent breach is a threat to the successful completion of a bonded
contract which, unless remedied by the surety, makes a default under the bond appear to be inevitable. 13 C.F.R.
§115.10.
76 13 C.F.R. §115.21.
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percentage of the bond premium.77 The current rate is 26% of the fee charged by the surety
company to the small business, rounded to the nearest dollar.78 The fee is due within 60 days after
the SBA’s approval of the prior approval payment or performance bond. The SBA does not
receive any portion of a surety’s non-premium charges.
Program Statistics
As shown in Table 2, the number and amount of bid bonds guaranteed by the SBA has generally
increased in recent years. For example, in FY2007, the SBA guaranteed 4,192 bid bonds totaling
$1.7 billion. In FY2014, the SBA guaranteed 9,324 bid bonds totaling nearly $5.1 billion.
Table 2 also shows that the number and amount of SBA-guaranteed final bonds declined
somewhat from FY2007 through FY2009 (coinciding with the 2007-2009 recession), and has
generally increased since then. Recent increases are likely due to generally improving economic
conditions and legislation that temporarily (P.L. 111-5) and then permanently (P.L. 112-239)
raised the program’s maximum individual contract amount from $2 million to $5 million, and up
to $10 million if a federal contracting officer certifies that such a guarantee is necessary.
Table 2. Number and Amount of SBA Guaranteed Bid Bonds and Final Bonds,
FY2007-FY2014
(S in billions)
Bid Bonds
Final Bonds
Fiscal Year
(# and $)
(# and $)
2007
4,192
$1.70
1,617
$0.55
2008
4,479
$1.92
1,576
$0.54
2009
4,915
$2.30
1,220
$0.47
2010
6,760
$3.39
1,588
$0.61
2011
6,775
$3.00
1,863
$0.61
2012
7,180
$3.10
2,323
$0.78
2013
9,793
$4.90
3,073
$1.20
2014
9,324
$5.06
3,060
$1.36
Source: U.S. Small Business Administration, Office of Congressional and Legislative Affairs, correspondence with
the author, on December 5, 2013, and November 24, 2014.
As shown in Table 3, excluding program costs of about $6.2 million annually, the program has
experienced a net positive cash flow in each of the past eight fiscal years. For example, in
FY2014, the program collected $16.7 million from fees and recoveries, paid out $9.7 million for
claims, and had a net gain of $7.0 million.79 There is about $73 million in the Surety Bond
Guarantee Program Revolving Fund.80
77 C.F.R. §115.32.
78 SBA, “Surety Bond Guarantee Program Fee,” 76 Federal Register 9632, February 24, 2006; and 13 C.F.R. §115.32.
79 SBA, Office of Congressional and Legislative Affairs, correspondence with the author, November 24, 2014.
80 U.S. Office of Management and Budget, Budget of the United States Government: FY2015: Appendix: Small
Business Administration, p. 1237.
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Table 3. Surety Bond Guarantee Program, Net Cash Flow, FY2007-FY2014
(excluding program costs of about $6.2 million annually)
Fees and Recoveries
Fiscal Year
Collected
Claims Paid
Net Cash Flow
2007
$8.3 mil ion
$5.2 mil ion
$3.1 mil ion
2008
$7.3 mil ion
$6.6 mil ion
$0.7 mil ion
2009
$7.8 mil ion
$6.0 mil ion
$1.8 mil ion
2010
$9.2 mil ion
$4.3 mil ion
$4.9 mil ion
2011
$8.9 mil ion
$5.8 mil ion
$3.1 mil ion
2012
$10.5 mil ion
$8.0 mil ion
$2.5 mil ion
2013
$16.2 mil ion
$4.7 mil ion
$11.5 mil ion
2014
$16.7 mil ion
$9.7 mil ion
$7.0 mil ion
Sources: U.S. Small Business Administration, Office of Congressional and Legislative Affairs, correspondence
with the author, on March 24, 2011, December 15, 2011, December 5, 2012, December 5, 2013, and November
24, 2014.
Historically, the program’s default rate has averaged about 2%.81 According to the SBA, on
average, the default rate on larger contracts tends to be lower than for smaller contracts and the
recovery rate for larger contract defaults tends to be greater than for smaller contract defaults.82
Currently, 19 sureties participate in the Prior Approval Program and 4 participate in the Preferred
Surety Bond Guarantee Program.83 Agents empowered to represent a participating surety
company are located, or licensed, in all 50 states, American Samoa, the District of Columbia,
Guam, the Marshall Islands, Micronesia, the Northern Mariana Islands, Palau, Puerto Rico, and
the Virgin Islands.84 In recent years, about 86% of the SBA’s surety bonds have been issued
through the Prior Approval Program and 14% through the Preferred Surety Bond Guarantee
Program.85
81 The default rate was 3.7% in FY2011, 3.1% in FY2012, 1.59% in FY2013, and 2.88% in FY2014. SBA, Office of
Congressional and Legislative Affairs, correspondence with the author, on September 29, 2011, December 11, 2012,
December 5, 2013, and November 24, 2014.
82 SBA, Office of Congressional and Legislative Affairs, correspondence with the author, December 5, 2012. The SBA
also reports that there is no significant difference in the loss rates for the Surety Bond Guarantee Program and the Prior
Approval program. SBA, Office of Congressional and Legislative Affairs, correspondence with the author, December
5, 2013.
83 SBA, “Surety Bonds: Participating Surety Companies and Agents,” at https://www.sba.gov/content/list-participating-
surety-companies-agents.
84 Ibid.
85 U.S. Congress, House Committee on Small Business, Security in Bonding Act of 2014, report to accompany H.R.
776, 113th Cong., 2nd sess., May 21, 2014, H.Rept. 113-462, part 2 (Washington: GPO, 2014), p. 3; and U.S. Congress,
House Committee on Small Business, Subcommittee on Contracting and Workforce, Building America: Challenges for
Small Construction Contractors, 113th Cong., 1st sess., May 23, 2013, H. Hrg. 113-019 (Washington: GPO, 2013), p.
19.
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Congressional Issues: Bond Limits and
Guarantee Rates
111th Congress: Bond Limits
P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA), provided the
program an additional appropriation of $15 million and temporarily increased, from February 17,
2009, through September 30, 2010, the maximum bond amount from $2 million to $5 million.86
The act also authorized the SBA to guarantee a bond of up to $10 million if a federal contracting
officer certified in writing that a guarantee in excess of $5 million was necessary.87 It also revised
the program’s size standard to “the size standard for the primary industry in which such business
concern, and the affiliates of such business concern, is engaged, as determined by the
Administrator in accordance with the North American Industry Classification System.”88 The new
size standard (e.g., up to $36.5 million in average annual receipts over the previous three years for
most heavy construction contractors, and up to $15.0 million in average annual receipts over the
previous three years for specialty trade contractors) increased the number of businesses that
qualified for the program.89 Using its rulemaking authority, the SBA made ARRA’s temporary
size standard permanent on August 11, 2010.90
Proponents argued that the increased bond limit and size were necessary to “ensure that small
businesses are able to secure the surety bonds they need to compete for contracts, grow, and hire
more employees.”91 They also argued that “in our current economic recession, small businesses
are finding it even more difficult to secure the credit lines necessary to get bonds in the private
sector.”92 In their view, the temporary changes would create “significant opportunities to create
86 The temporary higher maximum limit did not apply if the statement of work involved, directly or indirectly,
construction, operation, renovation or improvement of a casino or other gambling establishment, aquarium, zoo, golf
course, or swimming pool. 13 C.F.R. §115.12.
87 The contracting officer’s certification had to include a statement that the small business was experiencing difficulty
obtaining a bond and that an SBA bond guarantee would be in the best interests of the government. 13 C.F.R. §115.13.
88 P.L. 111-5, §508. Surety Bonds. The program’s size standard at that time had three parts: (1) up to $7 million in
average annual receipts for any construction (general or special trade) business, together with its affiliates; (2) any other
business had to meet the size standard for the primary industry in which it, combined with its affiliates, was engaged;
and (3)for any contract or subcontract, public or private, to be performed in the presidentially-declared disaster areas
resulting from the 2005 Hurricanes Katrina, Rita or Wilma, a construction (general or special trade) business
performing a contract for services was small if it met either of the above conditions, whichever was higher. 13 C.F.R.
§121.301.
89 SBA, “Table of Small Business Size Standards,” at https://www.sba.gov/content/small-business-size-standards. Land
subdivision contractors and dredging and surface cleanup contractors may have up to $27.5 million in average annual
receipts over the previous three years.
90 SBA, “Surety Bond Guarantee Program; Size Standards,” 76 Federal Register 48549, August 11, 2010. In addition,
for any contract or subcontract, public or private, to be performed in the presidentially declared disaster areas resulting
from the 2005 Hurricanes Katrina, Rita or Wilma, a construction (general or special trade) concern or concern
performing a contract for services is small if it meets the size standard set forth in paragraph (d)(1) of this section, or
the average annual receipts of the concern, together with its affiliates, do not exceed $7.0 million, whichever is higher.
13 C.F.R. §121.301(d)(2).
91 Senator Olympia Snowe, “Consideration of H.R. 1 American Recovery and Reinvestment Act of 2009,” Senate
debate, Congressional Record, vol. 155, no. 22 (February 4, 2009), p. S1485.
92 Ibid.
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jobs now in which small businesses will participate and be the driving engine for creation of new
jobs in our country.”93
There was no apparent organized opposition to these specific temporary changes to the Surety
Bond Guarantee Program. However, there was opposition to ARRA’s package of program
enhancements for the SBA as a whole, which among other things, provided the SBA $730 million
in additional funding, including $255 million for a temporary, two-year small business
stabilization program to guarantee loans of $35,000 or less to small businesses for qualified debt
consolidation, later named the America’s Recovery Capital (ARC) Loan program and $375
million to temporarily subsidize fees for the SBA’s 7(a) and 504/CDC loan guaranty programs
and increase the 7(a) program’s maximum loan guaranty percentage to 90%. Instead of modifying
the SBA’s program requirements and increasing the SBA’s appropriation, opponents advocated
business tax reduction, reform of financial credit market regulation, and federal fiscal restraint as
the best means to assist small businesses, generate economic growth, and create jobs.94
112th Congress: Bond Limits
On September 12, 2011, the Obama Administration advocated, as part of its proposed American
Jobs Act, a temporary increase in the SBA surety bond limit to $5 million until the end of
FY2012. The Administration argued that raising the program’s bond limit “will make it easier for
small businesses to take advantage of contracting opportunities generated by the American Jobs
Act’s proposed infrastructure investments.”95
On December 7, 2012, the Administration also recommended, as part of its request for an
additional $60.4 billion in federal resources to address damage caused by Hurricane Sandy, that
the SBA surety bond limit be increased to $5 million to enable “more small businesses to
participate in the recovery efforts.”96
There were several legislative efforts during the 112th Congress to increase the program’s bond
limit. S. 1334, the Expanding Opportunities for Main Street Act of 2011, and its companion bill in
the House, H.R. 2424, would have reinstated and made permanent ARRA’s higher limits (up 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). Neither of these bills was reported by a committee for
consideration by the House or the Senate.
S. 1660, the American Jobs Act of 2011, and its companion bill in the House, H.R. 12, would
have provided $3 million in additional funding to pay for the cost of temporarily increasing the
program’s bond limit to $5 million from $2 million until the end of FY2012. Cloture on a motion
to proceed to S. 1660 was not invoked in the Senate on October 11, 2011, by a vote of 50 to 49.
H.R. 12 was not reported by a committee for consideration in the House.
On December 12, 2012, the Senate Committee on Appropriations released its draft of the
Hurricane Sandy Emergency Assistance Supplemental bill. It included a provision to increase the
93 Senator Benjamin Cardin, “Stimulus Package Report,” Senate debate, Congressional Record, vol. 155, no. 30
(February 13, 2009), p. S2283.
94 For further information and analysis of the small business provisions in P.L. 111-5, see CRS Report R40985, Small
Business: Access to Capital and Job Creation, by Robert Jay Dilger.
95 The White House, “Section-by-Section Analysis and Explanation of the American Jobs Act of 2011,” September 12,
2011, at http://www.whitehouse.gov/blog/2011/09/12/president-obama-sends-american-jobs-act-congress.
96 Jeffrey D. Zients, Deputy Director for Management, U.S. Office of Management and Budget, “Letter sent to the
Honorable Harry Reid, Majority Leader of the Senate,” December 7, 2012, p. 59.
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program’s bond limit to $5 million.97 This provision was later removed following congressional
approval of H.R. 4310, the National Defense Authorization Act for Fiscal Year 2013, which
became law (P.L. 112-239) on January 2, 2013. It increased 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.
There was relatively little discussion in the legislative record concerning the reasons for
increasing the surety bond program’s bond limits, and even less discussion of the reasons for not
increasing the limits.98 Hearings were not held on S. 1334 and H.R. 2424. Also, only one witness
during hearings on H.R. 4310 addressed the SBA surety bond program. That witness supported an
increase in the surety bond limit to $5 million, and up to $10 million if a federal contracting
officer certifies that such a guarantee is necessary.99
Advocates argued that bond limits should be raised to bring them more in line with the
contracting amounts for other small business programs, such as the 8(a) Minority Small Business
and Capital Ownership Development Program, the Historically Underutilized Business Zone
(HUBZone) program, the Women-Owned Small Business Federal Contract program, and the
Service-Disabled Veteran-Owned Small Business Concerns Program.100 For example, under 8(a)
Minority Small Business and Capital Ownership Development Program, federal contracting
officials may provide a sole source award to a 8(a) small business if the anticipated award price
of the contract will not exceed $6.5 million for manufacturing contracts or $4.0 million for other
contract opportunities, and the contracting officer believes that the award can be made at a fair
and reasonable price.101 Advocates argued that raising the program’s bond limit would provide
more consistency across small business contracting programs and make it easier for agencies
experiencing difficulty issuing contracts in increments of $2 million or less (e.g., the Department
of Defense [DOD], the General Services Administration, and the Department of State) to
participate in the program.102
Advocates also argued that small businesses awarded contracts exceeding $2 million under the
other small business contracting programs are at risk of not being able to complete those contracts
97 U.S. Senate, Committee on Appropriations, “Text of Hurricane Sandy Supplemental,” December 12, 2012, §5501, p.
24, at http://www.appropriations.senate.gov/news.cfm?method=news.view&id=0f718f5d-c9e1-49a1-9b5a-
33a313bb423d.
98 See U.S. Congress, House Committee on Armed Services, Panel on Business Challenges Within the Defense
Industry, Doing Business With DOD: Unique Challenges Faced by Small and Mid-Sized Businesses, 112th Cong., 2nd
sess., January 17, 2012, HASC No. 112-94 (Washington: GPO, 2012), pp. 48-55. In 2007, the SBA supported a
legislative effort to increase the program’s bond limit to $3 million as a means to increase the program’s use. U.S.
Congress, House Committee on Small Business, Full Committee Hearing on Legislation Updating and Improving the
SBA’s Investment and Surety Bond Programs, 110th Cong., 1st sess., September 6, 2007, Serial No. 110-44
(Washington: GPO, 2007), p. 55.
99 U.S. Congress, House Committee on Armed Services, Panel on Business Challenges Within the Defense Industry,
Doing Business With DOD: Unique Challenges Faced by Small and Mid-Sized Businesses, 112th Cong., 2nd sess.,
January 17, 2012, HASC No. 112-94 (Washington: GPO, 2012), p. 52.
100 For further information and analysis of small business contracting programs, see CRS Report R40744, The “8(a)
Program” for Small Businesses Owned and Controlled by the Socially and Economically Disadvantaged: Legal
Requirements and Issues, by Kate M. Manuel and CRS Report R41268, Small Business Administration HUBZone
Program, by Robert Jay Dilger.
101 13 C.F.R. §124.506; 48 C.F.R. §19.1306(a)(1)-(6) (increasing the price thresholds, among other things); and
Department of Defense, General Services Administration, and National Aeronautics and Space Administration,
“Federal Acquisition Regulation: Inflation Adjustment of Acquisition-Related Thresholds,” 75 Federal Register 53129,
August 30, 2010.
102 SBA, Office of Congressional and Legislative Affairs, correspondence with the author, March 31, 2011.
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due to difficulties in securing a surety bond. For example, the House Committee on Armed
Services’ Panel on Business Challenges in the Defense Industry argued that the SBA surety bond
program’s limit should be increased to $6.5 million to match the 8(a) program’s $6.5 million
threshold for manufacturing contracts and to “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
FY2010 exceeded $5.9 million—nearly triple the size for which SBA can provide bonding
support.”103
There was no organized opposition to raising the program’s bond limits. One possible argument
that could have been raised is that higher limits could lead to higher amounts being guaranteed by
the SBA and, as a result, increase the risk of program losses. However, the SBA’s experience with
Recovery Act bonds (over $2 million) suggests that raising the limit may not lead to an increased
risk of program losses. The SBA reported that the program’s default rate on Recovery Act bonds
was lower, in 2009 and 2010, than for its other bonds. The SBA guaranteed 166 Recovery Act bid
bonds valued at $518.0 million and 52 Recovery Act final bonds valued at $145.4 million. There
were two defaults, with a bond value of $2.7 million and $2.2 million, respectively.104
113th Congress: Guarantee Rates
In an effort to enhance surety participation in the SBA’s program, H.R. 776, the Security in
Bonding Act of 2013, introduced and referred to the House Committee on the Judiciary and the
House Committee on Small Business on February 15, 2013, would have increased the Preferred
Surety Bond Guarantee Program’s guarantee rate from not to exceed 70% to not to exceed 90% of
losses. The bill was reported favorably by both committees on May 21, 2014, and included in
H.R. 4435, the Howard P. “Buck” McKeon National Defense Authorization Act for Fiscal Year
2015, which was passed by the House on May 22, 2014. This provision was not included in the
final version of the bill which was subsequently passed by Congress.
Advocates of increasing the Preferred Surety Bond Guarantee Program’s guarantee rate argued
that
Despite the different guarantee amounts and the differing levels of review, both the PAP
[Prior Approval Program] and PSBP [Preferred Surety Bond Guarantee Program] have
similar levels of default. However, over the years, the PSBP program has become less
effective for small businesses since only four sureties currently participate in the program
because the guarantee rates are no longer competitive enough to encourage commercial
sureties to participate. Therefore, since the PSBP is the more efficient program and …
does not expose taxpayers to any risk, this legislation amends the SBIA [Small Business
Investment Act] to standardize the guarantee rate at 90 percent.105
The SBA did not formally endorse the proposed guarantee rate increase. However, in its FY2015
and FY2016 congressional budget justification documents, the SBA indicated that it “will
investigate establishing a single guaranty percentage in the Prior Approval and Preferred Surety
103 U.S. Congress, House Committee on Armed Services, Panel on Business Challenges Within the Defense Industry,
Challenges to Doing Business with the Department for Defense, Findings of the Panel on Business Challenges in the
Defense Industry, 112th Cong., 2nd sess., March 19, 2012 (Washington: GPO, 2012), pp. 18-19.
104 SBA, Office of Congressional and Legislative Affairs, correspondence with the author, December 5, 2012.
105 U.S. Congress, House Committee on Small Business, Security in Bonding Act of 2014, report to accompany H.R.
776, 113th Cong., 2nd sess., May 21, 2014, H.Rept. 113-462, part 2 (Washington: GPO, 2014), pp. 2-3. CBO’s cost
estimate indicated that the bill would not have a significant effect on discretionary spending because it was expected
that the SBA would raise fees to cover any additional costs arising from the higher guarantee.
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Bond programs and restructuring the Prior Approval program.”106 Also, when asked at a
congressional hearing held on May 23, 2013, about the proposed guarantee rate increase, an SBA
official testified that
We are looking very closely at the program. We have seen a decline in the preferred
sureties going down from 50% to 14% of our program, which is a very small number. We
would like to see more participation in that program. Because of the additional cash flow
we have, we do not expect it to increase our costs. And we have some history in our other
programs that demonstrate that having the same guarantee level is not a disincentive.107
There was no discussion in the legislative record during the 113th Congress opposing an increase
in the guarantee rate for the Preferred Surety Bond Program. One possible objection might have
been that increasing the guarantee rate could increase the risk of program losses and result in
higher program fees. Higher fees, in turn, could cause hardship for some companies seeking a
surety bond.
114th Congress: Guarantee Rates
H.R. 838, the Security in Bonding Act of 2015, was introduced and referred to the House
Committee on the Judiciary and the House Committee on Small Business on February 10, 2015.
The bill would increase the Preferred Surety Bond Guarantee Program’s guarantee rate from not
to exceed 70% to not to exceed 90%, specify requirements concerning the pledge of assets by
individual sureties, and require GAO to examine the effects of these changes on small businesses.
The House-passed version of H.R. 1735, the National Defense Authorization Act for Fiscal Year
2016, included H.R. 838’s provisions. The Senate-passed version of the bill did not. The
conference agreement for H.R. 1735 includes H.R. 838’s provision to increase the Preferred
Surety Bond Guarantee Program’s guarantee rate from not to exceed 70% to not to exceed 90% of
losses and its provision to specify requirements concerning the pledge of assets by individual
sureties, subject to a one-year delay “to allow for the necessary rulemaking.”108
Congressional Issues: Program Structure
The SBA has reported that it is focusing on “strengthening relationships with individual surety
companies and the large network of bond agents and producers across the country in order to
reach more small businesses in need of bonding.”109 As part of this outreach effort, the SBA has
reported that it will continue to emphasize “process improvements that will streamline the
106 SBA, “FY2015 Congressional Budget Justification and FY2013 Annual Performance Report,” p. 40, at
https://www.sba.gov/sites/default/files/files/
FY%202015%20CBJ%20FY%202013%20APR%20FINAL%20508(1).pdf; and SBA, “FY2016 Congressional Budget
Justification and FY2014 Annual Performance Report,” p. 46, at https://www.sba.gov/sites/default/files/1-
FY%202016%20CBJ%20FY%202014%20APR.PDF.
107 U.S. Congress, House Committee on Small Business, Subcommittee on Contracting and Workforce, Building
America: Challenges for Small Construction Contractors, 113th Cong., 1st sess., May 23, 2013, H. Hrg. 113-019
(Washington: GPO, 2013), p. 19.
108 U.S. Congress, House Committee on Armed Services, National Defense Authorization Act For Fiscal Year 2016,
conference report to accompany H.R. 1735, 114th Cong., 1st sess., September 29, 2015, H. Rept. 114-270 (Washington:
GPO, 2015), pp. 144-145.
109 SBA, “FY2012 Congressional Budget Justification and FY2010 Annual Performance Report,” p. 40, at
https://www.sba.gov/sites/default/files/aboutsbaarticle/
FINAL%20FY%202012%20CBJ%20FY%202010%20APR_0.pdf.
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application requirements for small businesses and surety companies and their agents.”110 For
example, in August 2012, the SBA announced a “Quick APP” for surety bonds under $250,000
that provides a streamlined application process by combining “two applications into one to make
it easier and faster for small businesses and contractors, including veteran-owned small
businesses, to compete for contracts.”111
In addition, the SBA is also considering combing the Prior Approval Program and Preferred
Surety Bond Guarantee Program into a single program featuring the streamlined bond approval
and monitoring processes under the Preferred Program. Several industry groups, including the
National Association of Surety Bond Producers and The Surety & Fidelity Association of
America, have recommended that the programs be merged, the emphasis on reduced regulatory
burdens under the Preferred Program be maintained, and the program’s fees kept as low as
economically feasible as a means to encourage more sureties to participate in the program.112
Perhaps because the proposal has not been formally introduced as a bill, there are no public
statements opposing the merger of the two programs. Opposition might come from (1) those who
are not convinced that the Surety Bond Guarantee Program is necessary to supplement the private
market for surety bonds and would prefer that the program be eliminated rather than reformed or
(2) those who believe that a federal program is necessary to supplement the private market for
surety bonds, but the existing program is sufficient to meet that need and does not require
changes to encourage its expansion. Still other opponents might argue that providing additional
authority to sureties to approve and monitor bonds could increase the risk of defaults and program
losses.
Concluding Observations
Throughout the program’s history, both congressional testimony and GAO examinations have
indicated that smaller contracting firms, and especially minority-owned and women-owned small
business contracting firms, often have a more difficult time accessing surety bonds in the private
marketplace than larger firms. For example, in 1995, GAO reported that “it is not unusual for a
small construction company to have some difficulty in obtaining a surety bond.”113 GAO found
that about one in three of the smallest contracting firms it surveyed, compared with about one in
six of the larger contracting firms it surveyed, reported that they were required to provide
collateral.114 GAO also reported
The experiences of the minority-owned firms differed from those of the firms not owned
by minorities in several areas. For example, these firms were more likely to be asked to
provide certain types of financial documentation, as well as to provide collateral or to
meet other conditions; were more likely to be denied a bond and to report losing an
opportunity to bid because of delays in processing their request for a bond; and were
more likely to depend on jobs requiring bonds for a higher proportion of their revenues.
110 Ibid.
111 Interagency Task Force on Veterans Small Business Development, “Heroes on the Home Front: Supporting Veteran
Success as Small Business Owners,” pp. 5, 10 at https://www.sba.gov/sites/default/files/files/
Veterans_Report_FINAL.pdf.
112 National Association of Surety Bond Producers and The Surety & Fidelity Association of America, “Revitalizing
the SBA Bond Guarantee Program,” Washington, DC, May 24, 2010.
113 U.S. General Accounting Office, Small Business: Construction Firms’ Access to Surety Bonds, GAO/RCED-95-
173FS, June 26, 1995, p. 1, at http://www.gao.gov/archive/1995/rc95173f.pdf.
114 Ibid., p. 27.
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The women-owned firms differed from the firms not owned by women in a few key
respects. For example, they … were more likely to be asked to provide more types of
financial or other documentation to obtain a bond.
In addition, the minority-owned firms reported more often than the firms not owned by
minorities that they had to (1) establish an escrow account controlled by the surety
company, (2) hire a CPA or a management or consulting firm selected by the surety
company to manage the contract, and (3) enter into an arrangement that allows the surety
company to manage the job even when the firm is not in default.115
Although congressional testimony and GAO examinations have supported the need for a program
such as the SBA’s Surety Bond Guarantee Program, that testimony and GAO’s surveys of
businesses have been somewhat less useful in helping Congress determine the appropriate size for
the program. For example, a review of congressional hearings since the program’s inception
suggests that congressional witnesses representing the surety companies and various construction
organizations, including minority-owned small contracting businesses, have focused their
testimony on the need to reduce the SBA’s paperwork requirements, which are designed to
prevent fraud but increase the sureties’ costs; keep the program’s fees as low as possible; and
keep the program’s guarantee rates as high as possible. The SBA’s testimony has tended to focus
on the need to attract more sureties to the program so that it can reverse the slow downward
trajectory the program has experienced over the past two decades in the number and amount of
final bonds guaranteed. There has been relatively little testimony provided concerning the broader
issue of how large the program should be in comparison with the private sector and what
measures or metrics could be used to help make that determination.
One possible starting point for determining the program’s size in comparison with the private
sector is to examine congressional testimony concerning the supply and demand for sureties in
the private sector. That testimony suggests that the supply and demand for sureties tends to
fluctuate with changes in the overall economy, with the supply of sureties contracting during
economic recessions and expanding during economic expansions and the demand for sureties
slowing during economic recessions and increasing during economic expansions.116 Arguably,
federal policies could take these fluctuations into account—enacting policies that expand federal
support for surety guarantees when supply is tight and reducing federal support for surety
guarantees when supply is more plentiful. Of course, when making these decisions, it is necessary
to first establish measures or metrics to determine current market conditions. In addition, this line
of reasoning assumes that having a federal presence in the surety marketplace is desirable, an
assumption not held by all. Ultimately, although having established measures or metrics
concerning the supply and demand for surety bonds might be helpful in determining the
appropriate size for the SBA’s Surety Bond Guarantee Program, that decision will largely rest on
personal views concerning the role of the federal government in the private marketplace and the
level of acceptable risk in assisting small businesses to gain greater access to surety bonds.
115 Ibid., pp. 19, 20, 29.
116 U.S. Congress, House Committee on Small Business, Full Committee Hearing on Legislation Updating and
Improving the SBA’s Investment and Surety Bond Programs, 110th Cong., 1st sess., September 6, 2007, Serial No. 110-
44 (Washington: GPO, 2007), p. 64.
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SBA Surety Bond Guarantee Program
Appendix. SBA Surety Bond Guarantee
Program Statistics
Table A-1. SBA Surety Bond Guarantee Program Volume, Final Bonds,
FY1971-FY2014
Fiscal
Final Bonds
Contract Value
Year
Guaranteed
(SBA Share)
1971
7
$312,252
1972
1,339
$94,434,157
1973
5,597
$351,189,011
1974
9,182
$633,229,829
1975
11,595
$706,152,366
1976
7,831
$503,607,938
1977
15,485
$886,500,000
1978
19,044
$1,177,500,000
1979
20,095
$1,390,900,000
1980
19,928
$1,534,400,000
1981
17,821
$1,400,000,000
1982
10,306
$763,800,000
1983
7,703
$567,400,000
1984
7,262
$571,000,000
1985
10,778
$959,100,000
1986
11,200
$1,043,900,000
1987
11,128
$957,400,000
1988
11,097
$1,051,000,000
1989
11,183
$1,151,600,000
1990
9,943
$1,071,200,000
1991
7,544
$896,300,000
1992
7,262
$848,300,000
1993
6,478
$944,000,000
1994
6,591
$1,090,000,000
1995
6,807
$1,200,000,000
1996
4,684
$724,596,082
1997
4,021
$615,000,000
1998
2,860
$414,000,000
1999
2,399
$426,000,000
2000
1,774
$242,784,741
2001
1,703
$254,295,891
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SBA Surety Bond Guarantee Program
Fiscal
Final Bonds
Contract Value
Year
Guaranteed
(SBA Share)
2002
2,123
$350,782,086
2003
2,400
$459,331,071
2004
2,230
$475,347,150
2005
1,680
$387,401,149
2006
1,706
$427,666,723
2007
1,617
$444,852,668
2008
1,576
$429,437,158
2009
1,220
$377,896,791
2010
1,588
$487,550,613
2011
1,863
$488,102,579
2012
2,323
$625,301,882
2013
3,073
$1,002,076,616
2014
3,060
$1,093,716,341
Total
297,106
$31,519,365,094
Sources: U.S. Congress, Senate Committee on Banking, Housing, and Urban Affairs, Oversight of SBA Set-Aside,
Lease Guaranty, and Surety Bond Programs, 94th Cong., 2nd sess., March 8, 1976 (Washington: GPO, 1976), p. 28;
U.S. Congress, House Committee on Small Business, Subcommittee on General Oversight and Minority
Enterprise, Overview of SBA’s Activities, 96th Cong., 1st sess., February 28, 1979 (Washington: GPO, 1979), p. 108;
U.S. Congress, House Committee on Appropriations, Subcommittee on the Departments of State, Justice, and
Commerce, The Judiciary, and Related Agencies, Departments of State, Justice, and Commerce, The Judiciary, and
Related Agencies Appropriations for 1980, Part 6, 96th Cong., 1st sess., March 27, 1979 (Washington: GPO, 1979), p.
603; U.S. Congress, House Committee on Appropriations, Subcommittee on the Departments of State, Justice,
and Commerce, The Judiciary, and Related Agencies, Departments of State, Justice, and Commerce, The Judiciary,
and Related Agencies Appropriations for 1981, Part 4, 96th Cong., 2nd sess., March 10, 1980 (Washington: GPO,
1980), p. 532; U.S. Congress, House Committee on Appropriations, Subcommittee on the Departments of
Commerce, Justice, and State, The Judiciary, and Related Agencies, Departments of Commerce, Justice, and State,
The Judiciary, and Related Agencies Appropriations for 1982, Part 7, 97th Cong., 1st sess., March 16, 1981
(Washington: GPO, 1981), p. 15; U.S. Congress, House Committee on Appropriations, Subcommittee on the
Departments of Commerce, Justice, and State, The Judiciary, and Related Agencies, Departments of Commerce,
Justice, and State, The Judiciary, and Related Agencies Appropriations for 1983, Part 5, 97th Cong., 2nd sess., March 22,
1982 (Washington: GPO, 1982), p. 162; U.S. Congress, House Committee on Appropriations, Subcommittee on
the Departments of Commerce, Justice, and State, The Judiciary, and Related Agencies, Departments of
Commerce, Justice, and State, The Judiciary, and Related Agencies Appropriations for1984, Part 4, 98th Cong., 1st sess.,
March 9, 1983 (Washington: GPO, 1983), p. 625; U.S. Congress, House Committee on Appropriations,
Subcommittee on the Departments of Commerce, Justice, and State, The Judiciary, and Related Agencies,
Departments of Commerce, Justice, and State, The Judiciary, and Related Agencies Appropriations for1985, Part 5, 98th
Cong., 2nd sess., March 26, 1984 (Washington: GPO, 1984), p. 573; U.S. Congress, House Committee on
Appropriations, Subcommittee on the Departments of Commerce, Justice, and State, The Judiciary, and Related
Agencies, Departments of Commerce, Justice, and State, The Judiciary, and Related Agencies Appropriations for1986,
Part 4, 99th Cong., 1st sess., March 14, 1985 (Washington: GPO, 1985), p. 716; U.S. Congress, House Committee
on Appropriations, Subcommittee on the Departments of Commerce, Justice, and State, The Judiciary, and
Related Agencies, Departments of Commerce, Justice, and State, The Judiciary, and Related Agencies Appropriations
for1987, Part 5, 99th Cong., 2nd sess., March 24, 1986 (Washington: GPO, 1986), p. 305; U.S. Congress, House
Committee on Appropriations, Subcommittee on the Departments of Commerce, Justice, and State, The
Judiciary, and Related Agencies, Departments of Commerce, Justice, and State, The Judiciary, and Related Agencies
Appropriations for1988, Part 3, 100th Cong., 1st sess., March 4, 1987 (Washington: GPO, 1987), pp. 289, 323; U.S.
Congress, House Committee on Appropriations, Subcommittee on the Departments of Commerce, Justice, and
State, The Judiciary, and Related Agencies, Departments of Commerce, Justice, and State, The Judiciary, and Related
Agencies Appropriations for1989, Part 1, 100th Cong., 2nd sess., March 3, 1988 (Washington: GPO, 1988), pp. 278;
Congressional Research Service
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SBA Surety Bond Guarantee Program
U.S. Congress, House Committee on Appropriations, Subcommittee on the Departments of Commerce, Justice,
and State, The Judiciary, and Related Agencies, Departments of Commerce, Justice, and State, The Judiciary, and
Related Agencies Appropriations for1990, Part 6, 101st Cong., 1st sess., March 15, 1989 (Washington: GPO, 1989), p.
406; U.S. General Accounting Office, Small Business: Information on and Improvements Needed to Surety Bond
Guarantee Programs, GA)/RCED-91-99, April 23, 1991, p. 19, at http://archive.gao.gov/d20t9/143966.pdf; U.S.
Congress, House Committee on Appropriations, Subcommittee on the Departments of Commerce, Justice, and
State, The Judiciary, and Related Agencies, Departments of Commerce, Justice, and State, The Judiciary, and Related
Agencies Appropriations for1991, Part 6, 101st Cong., 2nd sess., March 21, 1990 (Washington: GPO, 1990), p. 810;
U.S. Congress, House Committee on Appropriations, Subcommittee on the Departments of Commerce, Justice,
and State, The Judiciary, and Related Agencies, Departments of Commerce, Justice, and State, The Judiciary, and
Related Agencies Appropriations for1992, Part 6, 102nd Cong., 1st sess., March 14, 1991 (Washington: GPO, 1991),
p. 233; U.S. Congress, House Committee on Appropriations, Subcommittee on the Departments of Commerce,
Justice, and State, The Judiciary, and Related Agencies, Departments of Commerce, Justice, and State, The Judiciary,
and Related Agencies Appropriations for1993, Part 5, 102nd Cong., 2nd sess., February 19, 1992 (Washington: GPO,
1992), p. 131; U.S. Congress, House Committee on Appropriations, Subcommittee on the Departments of
Commerce, Justice, and State, The Judiciary, and Related Agencies, Departments of Commerce, Justice, and State,
The Judiciary, and Related Agencies Appropriations for1994, Part 5, 103rd Cong., 1st sess., March 24, 1993
(Washington: GPO, 1993), pp. 960, 1122; U.S. Congress, House Committee on Small Business, Small Business
Reauthorization and Amendment Act of 1994, report to accompany H.R. 4801, 103rd Cong., 2nd sess., July 21, 1994,
H. Rept. 103-616 (Washington: GPO, 1994); U.S. Congress, House Committee on Appropriations,
Subcommittee on the Departments of Commerce, Justice, and State, The Judiciary, and Related Agencies,
Departments of Commerce, Justice, and State, The Judiciary, and Related Agencies Appropriations for1995, Part 5, 103rd
Cong., 2nd sess., March 4, 1994 (Washington: GPO, 1994), pp. 716; U.S. Congress, House Committee on
Appropriations, Subcommittee on the Departments of Commerce, Justice, and State, The Judiciary, and Related
Agencies, Departments of Commerce, Justice, and State, The Judiciary, and Related Agencies Appropriations for1996,
Part 6, 104th Cong., 1st sess., March 30, 1995 (Washington: GPO, 1995), p. 529; U.S. Congress, House
Committee on Small Business, Subcommittee on Procurement, Exports and Business Opportunities, Small
Business Administration’s Surety Bond Guarantee Program, 104th Cong., 1st sess., April 5, 1995, Serial No. 104-24
(Washington: GPO, 1995), p. 98; U.S. Congress, House Committee on Appropriations, Subcommittee on the
Departments of Commerce, Justice, and State, The Judiciary, and Related Agencies, Departments of Commerce,
Justice, and State, The Judiciary, and Related Agencies Appropriations for1997, Part 5, 104th Cong., 2nd sess., April 33,
1996 (Washington: GPO, 1996), p. 733; U.S. Small Business Administration, Office of the Chief Financial Officer,
Annual Report, 1997, p. 27; U.S. Small Business Administration, Office of the Chief Financial Officer, Annual Report,
1998, p. 27; U.S. Small Business Administration, FY 1999 Performance and Accountability Report, p. 29; and U.S.
Small Business Administration, FY 2002 Performance and Accountability Report, p. 78.
Notes: The number of final bonds guaranteed in FY1990-FY1992, FY1996, and FY2000-FY2004, and the contract
values for FY1996 and FY2000-FY2010 were provided by the U.S. Small Business Administration, Office of
Congressional and Legislative Affairs, correspondence with the author, September 29, 2011. The number of final
bonds guaranteed in FY2011, and the contract value for FY2011 was provided by the U.S. Small Business
Administration, Office of Congressional and Legislative Affairs, correspondence with the author, December 15,
2011. The number of final bonds guaranteed in FY2012, and the contract value for FY2012 was provided by the
U.S. Small Business Administration, Office of Congressional and Legislative Affairs, correspondence with the
author, December 11, 2012. The number of final bonds guaranteed in FY2013, and the contract value for FY2013
was provided by the U.S. Small Business Administration, Office of Congressional and Legislative Affairs,
correspondence with the author, December 5, 2013. The number of final bonds guaranteed in FY2014, and the
contract value for FY2014 was provided by the U.S. Small Business Administration, Office of Congressional and
Legislative Affairs, correspondence with the author, November 24, 2014.
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SBA Surety Bond Guarantee Program
Table A-2. SBA Surety Bond Guarantee Program Volume,
Bid and Final Bonds Combined, FY2000-FY2014
Bid and Final
Fiscal Year
Bonds Approved
Contract Value
2000
7,034
$1,672,000,000
2001
6,320
$1,400,000,000
2002
7,372
$461,001,775
2003
8,974
$593,572,000
2004
7,803
$594,669,000
2005
5,678
$907,674,000
2006
5,214
$1,730,000,000
2007
5,809
$2,250,000,000
2008
6,055
$2,450,000,000
2009
6,135
$2,760,000,000
2010
8,348
$4,000,000,000
2011
8,638
$3,607,069,163
2012
9,503
$3,917,114,158
2013
12,866
$6,151,424,437
2014
12,384
$6,413,408,331
Sources: U.S. Small Business Administration, “FY 2000 Performance and Accountability Report,” p. 37; U.S.
Small Business Administration, “FY 2001 Performance and Accountability Report,” p. 16; U.S. Small Business
Administration, “FY 2002 Performance and Accountability Report,” p. 78; U.S. Small Business Administration,
“FY2002 Budget Request and Performance Plan,” p. 34; U.S. Small Business Administration, “FY2003 Budget
Request and Performance Plan,” pp. 17, 19; U.S. Small Business Administration, “SBA Budget Request &
Performance Plan, FY2004,” pp. 3, 4; U.S. Smal Business Administration, “Congressional Submission Fiscal Year
2005,” p. 15; U.S. Small Business Administration, “Congressional Submission Fiscal Year 2006,” pp. 19, 78; U.S.
Small Business Administration, “FY2007 Congressional Budget Request and Performance Plan,” pp. 25, 71; U.S.
Small Business Administration, “FY2009 Congressional Budget Justification and FY207 Annual Performance
Report,” p. 65; U.S. Small Business Administration, “FY2012 Congressional Budget Justification and FY2010
Annual Performance Report,” p. 40; and U.S. Small Business Administration, Office of Congressional and
Legislative Affairs, correspondence with the author, on December 15, 2011, December 11, 2012, December 5,
2013, and November 24, 2014.
Author Contact Information
Robert Jay Dilger
Senior Specialist in American National Government
rdilger@crs.loc.gov, 7-3110
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