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.

The 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 PresidentLynn M. Schuberttestified 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 the bond.

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:

Qualifications.Enhance 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,” Schubert said.

Procurement Reform.Create 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.

Under current regulations, small contractors lose their status as a small contractor and are no longer qualified for projects designated for small business participation.

Source: The Surety & Fidelity Association of America