Tuesday, March 31, 2009

Surety Bonds Sure Are Making Things More Competitive

Contracting with the government has just gotten a little more interesting. The US Small Business Administration increased the limit on surety bonds for small business contractors from $2 million to $5 million. That extra $3 million means that more small business contractors are going to be able to bid on higher paying contracts that were off-limits to them before.

For many people that does not mean anything; many are left wondering what Surety Bonds are. Most of the definitions that available online are not satisfactory and left me feeling a bit baffled. One way to look at them is that surety bonds are paid for by a third party insurance company, stating that if the contractor should default on a contract the government still gets the job done or has their money returned. A better analogy is that it is like when you buy a new car; during the loan process, you have to prove you have car insurance just in case you total the car before the loan is paid.

What does this mean though? In theory, larger surety bonds are going to help small businesses get more of the stimulus construction contracts, such as paving roads or constructing buildings. Acting SBA Administrator Darryl K. Hairston claims that “These changes will support small and emerging businesses nationwide, particularly construction contractors who have seen their markets hurt by a poor economy and lagging construction environment.” The $3 million increase in surety bonds is only one of the many changes the SBA has made recently. The SBA seems to be going all out trying to help small business gain federal contracts. One of the other changes made to the Federal Register allows the SBA to give a surety bond on a federal contract worth up to $10 million; however the SBA will only award such large Surety Bonds if the contracting officer determines that it is required.

Many contractors have a surety bonds in one form or another, however, not every company will be able to obtain one for $10 million. The range varies depending on the contract and your businesses performances. A thing to keep in mind is that when you are bidding on a contract, make sure that your business can provide what is being asked. The point of a surety bond is to prevent the government from losing money. Ideally you will never need to use one, but it is often required to have one for contracts. Obviously, you never want to default on a government contract because the likelihood of your business ever getting another is slim to none.

1 comment:

  1. "One way to look at them is that surety bonds are paid for by a third party insurance company"

    The bonding company only pays if the government places a valid claim (you can be sure the surety always GETS paid their premium for the bond).

    Think of suretyship as a form of credit. If the contractor does not post a bond, then they must post another asset, like a letter of credit (which requires cash to be frozen in a bank account). For the contractors that don't have the cash or simply don't want to lessen their liquidity, they can post a bond instead. Since the bonding company is guaranteeing their work, it is considered a form of credit.

    Feel free to ask a follow up question on my forums at: http://forums.jwsuretybonds.com

    ...or my blog at: http://www.jwsuretybonds.com/blog

    (links are appreciated as well!)