The Surety & Fidelity Association of America (SFAA) testified before a U.S. House Veterans’ Affairs subcommittee that a bill aimed at helping small veteran-owned contractors obtain surety bonding, as drafted, would not achieve its intended purposes, and in fact, would hurt the very businesses it is designed to help.
Among other provisions, H.R. 294, the
Veteran-Owned Small Business Promotion Act of 2009, would cut in half the size
of performance and payment bonds required from small veteran-owned contractors when
bidding on federal construction projects.
Subcommittee on Economic Opportunity of the House Committee on Veterans’
Affairs invited SFAA to testify on the legislation to provide its assessment of
how and to what extent the bill’s surety bond provisions would achieve the
legislation’s objective of promoting small veteran-owned business, to offer
guidance on how performance and payment bonds are underwritten and to provide
solutions for enhancing the bonding of small veteran-owned and controlled contractors.
SFAA President Lynn M. Schubert
testified that the bill falls short in assisting such small contractors for several
reasons. Since a performance bond secures the contractor’s obligation to
perform the entire contract, a surety company’s financial and other
underwriting thresholds are based on the size of the contract, not the size of
For a million dollar project, for example, the
surety would assess the contractor’s capability to perform the obligations of
the entire contract, regardless of whether a $500,000 bond would be permitted
under H.R. 294. A surety’s evaluation of a contractor is designed to prevent
defaults on public construction projects. Reducing the required amount of the
surety bonds does not affect availability to any significant degree.
In addition, Schubert noted that requiring
a performance and payment bond of less than 100 percent of the contract unnecessarily exposes the government and taxpayers
to additional costs and subcontractors and suppliers to the risk of
nonpayment if there is a default.
While SFAA supports the intent of the
legislation – to help small veteran-owned and controlled businesses participate
in federal construction projects – and is committed to helping accomplish this,
Schubert offered SFAA’s own suggestions for helping small veteran-owned and
controlled businesses obtain surety bonding:
the contractor’s financial and operational capabilities. SFAA’s Model
Contractor Development Program has been implemented successfully in a number of
states to help small and emerging contractors become ready for and obtain
surety bonding through educational workshops and a bond readiness component.
SFAA also has entered into several Memorandums of Understanding with partners
to assist small and emerging contractors with becoming bondable or increasing
their bonding capacity.
Capital. Implement a
capital access component to provide small veteran-owned and controlled
contractors with the working capital and collateral guarantees they need to
provide the financial stability in their businesses that would make them
bondable. “Many times, what is perceived as a surety bonding problem is the
inability of the contractors to get the lines of credit that they need,”
federal mandates and incentives to break construction contracts into smaller parts to create genuine opportunities
for small and emerging contractors. “We see a disconnect between the size of federal projects that are advertised to
meet small business goals and the
size of construction projects that these small contractors are qualified to perform,”
Schubert said. “We see $50 million federal contracts being designated for small
business participation. That is not realistic for a small contractor.”
Schubert also urged that federal procurement rules
be changed to allow small businesses to perform the work that they can on
federal construction project. Small veteran-owned contractors should be
permitted to joint venture with larger contractors, using the larger
contractor’s surety bond relationship to obtain the bonds for the project and
develop an independent relationship with the surety for future projects.
current regulations, small contractors lose their status as a small contractor
and are no longer qualified for projects designated for small business
Source: The Surety & Fidelity Association of
SFAA: Portions Of Veterans Affairs' Bill Hurts Small Veteran-Owned Construction Contractors
September 25, 2009