The Surety Bond Guarantee Program

The Surety Bond Guarantee Program of the Small Business Administration (SBA) was established to guarantee up to 90 percent of a surety company's losses on bonds issued to small businesses which could not obtain bonding without the guarantee. From its inception in 1971, the program guaranteed more than 91,000 contracts totaling $6.3 billion. GAO evaluated the management of the program.

SBA has not managed the Surety Bond Guarantee Program satisfactorily. GAO identified four principle problem areas. First, SBA approved most bond guarantee applications on the basis of limited reviews of incomplete or erroneous underwriting data. As a result of this practice, SBA-guaranteed contractors defaulted on about 5,600 contracts. Second, SBA and participating sureties made little effort to minimize losses by attempting to prevent contractor defaults. Dealing with sureties which specialize in writing SBA-guaranteed bonds raised the costs of defaults to SBA since most specialty sureties do not have the capability to handle claims internally; the cost of claims handled by outside attorneys was charged to SBA. Third, the program has not significantly contributed toward graduating contractors into the private bonding market. This has been due to a failure to encourage graduation, a reluctance on the part of specialty sureties to issue bonds without SBA guarantees, and the failure of SBA to establish guidelines regarding contractor graduation. Fourth, SBA did not identify the need for management assistance or provide assistance to program contractors; rather, program officials responded only to infrequent requests for assistance.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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