Hello again, Ed,
I'm glad you decided to go ahead with the information I can offer. My
overall impression is that -- thanks to some creative government
programs -- the odds are quite good for a small business to get a
performance bond, even if it's not sitting on a pile of cash.
Congress mandated that certain government contracts include a
requirement that contractors be covered by a performance bond. The
idea was to protect the interests of the government should a
contractor default on their obligations.
Unfortunately, the requirement for a performance bond added to the
difficulties that many small contractors face when trying to compete
with the big boys for access to government contract opportunities.
Recognizing this, Uncle Sam created the "Surety Bond Guarantee
Program" administered by the U.S. Small Business Administration. SBA
is able to issue a guarantee for the performance of a contract. This
guarantee, in turn, eliminates a great deal of the risk for a surety
provider in offering a performance bond to a small business.
Bottom line here is two-fold:
(1) It may well be possible for your business to get an SBA Surety
Bond guarantee, which could then lead to a private company issuing an
actual performance bond. I suggest you pursue this option with all
due vigor.
(2) The flip side is, you're dealing with a federal agency which - no
matter how friendly it is to small businesses -- is first and foremost
a government bureaucracy. Expect a fair share of paperwork,
gobbledegook, and frustrations. But in the end, you just may wind up
with what you're after.
Your most important first steps are to familiarize yourself with the
SBA program and then contact SBA directly. At the same time, you
should begin exploring private sector resources to help you identify
an appropriate surety bond (performance bond) provider, and to work
through the private sector process in hopes of securing yourself a
performance bond.
But before diving into the details, let me say that if anything here
is unclear -- or if you feel you need additional information -- just
let me know by posting a Request for Clarification. I am more than
happy to continue working on this question until you have all the
information you need.
Now for the first stop: SBA:
------------------------------
A general introduction to surety bonds is provided here and describes
the four types of bonds, one of which is the performance bond:
http://www.sba.gov/financing/bonds/whatis.html
What's a Surety Bond?
A surety bond is a three-party instrument between a surety, the
contractor and the project owner. The agreement binds the contractor
to comply with the terms and conditions of a contract. If the
contractor is unable to successfully perform the contract, the surety
assumes the contractor's responsibilities and ensures that the project
is completed. Below are the four types of contract bonds that may be
covered by an SBA guarantee:
1. Bid - Bond which guarantees that the bidder on a contract will
enter into the contract and furnish the required payment and
performance bonds.
2. Payment - Bond which guarantees payment from the contractor of
money to persons who furnish labor, materials equipment and/or
supplies for use in the performance of the contract.
3. Performance - Bond which guarantees that the contractor will
perform the contract in accordance with its terms.
4. Ancillary - Bonds which are incidental and essential to the
performance of the contract.
-------------------------------
A more detailed description of the program is provided here:
http://www.sba.gov/financing/bonds/osgprogram.html
You should look over this page in detail, but I'll provide a bit of a
summary of the key points:
In a nutshell, SBA can issue guarantees to small businesses for
contracts less than $2 million in value. Basically, the SBA guarantee
offers to reimburse the surety bond company for most of the funds they
would have to pay out as a result of a default on a contract. With
such generous coverage, the surety companies are far more willing to
issue performance bonds to small companies, even where the financial
situation might argue against doing so without a guarantee.
There are two ways that a surety company can be involved with the SBA
under this program -- the Prior Approval program or the Preferred
Surety Bond (PSB) program. The details of these two are covered at the
link above, but the most important bit of information is this:
"Any surety company certified by the U.S. Treasury to issue bonds may
apply for participation in the Prior Approval program, but its bonds
are subject to SBA's prior review and approval. Contractors bonded
under this program are generally smaller and less experienced than
contractors bonded under the Preferred Surety Bond (PSB) program. To
compensate surety companies for the risk associated with bonding Prior
Approval contractors, SBA guarantees 90 percent of the losses incurred
on bonds up to $100,000 and on bonds to socially and economically
disadvantaged contractors, and 80 percent of the losses incurred on
all other bonds under this program."
I'm guessing you fall into the "smaller and less experienced category"
so I think you'll want to focus on the Prior Approval program. But
familiarize yourself with the PSB program as well (which is less
generous in its coverage) just in case it comes up in conversation.
Another paragraph worth extracting in full will give you an idea of
the paperwork mountain you're about to get involved with:
-----
Duties of Contractor
Contractors should apply for a specific bond with an agent or surety
company of their choice, providing background, credit and financial
information required by the surety company and the SBA.
The contractor must complete the following forms, which are available
from participating agents (a list of agents is available from your
local SBA district office)
SBA Form 994: Application for Surety Bond Guarantee Assistance
SBA Form 912: Statement of Personal History (on first application and
once every two calendar years thereafter)
SBA Form 994F: Schedule of Uncompleted Work on Hand (required
initially and then at least quarterly)
SBA Form 1624: Certification Regarding Debarment, Suspension,
Ineligibility and Voluntary Exclusion Lower Tier Covered Transactions
SBA Form 1261: Statement of Laws and Executive Orders
-----
There are some fees associated with all this, but they seem fairly
small (at SBA's end anyway -- don't forget the private surety company
will also exact a toll, which typically ranges from 0.5 - 2% of the
overall contract amount). There's a description of the fee system,
and some other useful background, on the FAQs page at:
http://www.sba.gov/financing/bonds/faqs.html
Q: What are my costs associated with obtaining an SBA surety bond
Guarantee?
A: All final bond applications, and all bid bonds resulting in
awards, require a processing fee of $6.00 per thousand dollar of the
contract face value. You pay the processing fee, however I the event
of cancellation, or if for some reason the bond is not issued, the
processing fee will be returned.
[Note, however, that the fees seem to change quite often, and even
vary from state to state, so don't take these figures as absolute
gospel].
------------------------------
I urge you to spend some time at the SBA site exploring around. They
have a lot of links both to SBA information and to outside resources,
that can educate you on this topic to whatever degree of depth you
desire.
One more link to note is another general overview of the program, but
it offers a nicely-done "plain English" version of some of the program
details:
http://www.sba.gov/opc/pubs/fs21.html
The Facts About . . .
The Surety Bond Guarantee Program
--------------------------------
HOWEVER, the real advantage of SBA is not so much their website as it
is the human beings who work them. I spoke with a few of them in
preparation for this answer, and they offered nothing but
encouragement. One fellow told me point blank that finances (or lack
thereof) are no obstacle to getting a performance bond if a small
business can demonstrate its expertise and managerial competence to
perform on a specific contract.
The name of that fellow was:
Dimitri Madison
SBA Surety Bond Specialist
Phone: 215/580-2720
FAX: 215/580-2759
He told me that when you're ready you should give him a call or fax
him – include a description of your business, the contract of
interest, and your interest in a performance bond -- and that he could
act as your point of contact and help walk you through the process.
(He also mentioned that, even though SBA has a field operation in
Pittsburgh, that you're really better off dealing directly with him).
-----------------------------
-----------------------------
Now that we've covered the government side of the equation, it's time
to look at the private sector side. Head to the site of the Surety
Information Office, a trade association group of surety companies:
http://www.sio.org/contractor/contractor6.html
The offer a host of information about surety bonds in general, and
SBA's program in particular. The site above includes links to these
pages/documents:
Resources for Contractors & Subcontractors
--10 Things You Should Know About Surety Bonding
--Are You Protected?: Do Contractor Default Insurance and
Subcontractor Default Insurance Stand --Up to Surety Bonds?
--How to Obtain Surety Bonds
--Does Subcontractor Default Insurance Stand Up to Surety Bonds? -
Contractors
--SBA's Surety Bond Guarantee Program - Helping Contractors Grow ***
--Surety Bonds in the 21st Century...A Guide to the Electronic Filing
of Surety Bonds
--Surety Bonds Versus Bank Letters of Credit
--Surety Companies: What They Are and How to Find Out About Them ***
--The Importance of Surety Bonds in Construction
--Surety Bonds 101
--Risk & Responsibility: Understanding Contract Surety Bonds
--Obtaining Surety Credit: An Introduction to the Surety Process for
Contractors
--Building a Solid Surety Relationship
--Reducing Subcontractor Financial Risk
I've asterisked the documents that seem most important, but again, you
may want to do a general exploration of the entire site, to
familiarize yourself with the territory.
However, if I can offer a bit of a gut reaction...you can also skip
the whole private sector side of things for the moment. The folks at
SBA know this territory inside and out, and can assist you in
understanding what/who is out there, and how to make an informed
choice about what company to turn to in order to obtain a performance
bond. The value of going to school on this is just to reach a comfort
level that the people you'll be dealing with are, in fact, as
knowledgeable as it seems to me that they are.
-----------------------
I also want to mention that I searched the state of Pennsylvania site
for additional information on surety bond programs, but came up empty
handed. However, I did come across an item that may be of interest to
you:
http://www.inventpa.com/default.aspx?id=279
Pennsylvania Capital Access Program (PennCAP)
Summary
Loan guarantee through participating banks to be used to support a
wide variety of business purposes
Eligible Uses
Land
Building
Equipment
Working capital
Where to Apply
Participating Banks:
Fidelity Deposit and Discount Bank -- Contact: Gene Walsh,
570-342-8281
PNC Bank, N.A. -- Contact: Marie Hansen, 412-762-2414
AmeriServ Financial -- Contact: John Kubinsky, 814-533-5205
Sovereign Bank -- Contact: Ed McDuell, 610-526-6330
Amounts
Guaranteed loans up to $500,000
[Visit the site itself for additional information, and links to a
program brochure]
-------------------------
I hope this is the information you need. As I said earlier, don't
hesitate to ask for additional clarification or more information, if
needed.
And of course...best of luck. |
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