Small Business Administration's Surety Bond Guarantee Program

The Small Business Administration's (SBA) Surety Bond Guarantee Program was reviewed. Under the Surety Bond Guarantee Program, SBA guarantees 80 to 90 percent of a surety company's losses on bonds executed for small businesses which can be reasonably expected to perform as required by a contract and which cannot obtain bonding without the guarantee. Surety companies pay SBA 20 percent of the bond premium in return for the guarantee. Review of the program showed that: (1) bond guarantees often are based on unreliable underwriting data and superficial reviews; (2) SBA and the surety companies are making little effort to minimize losses; (3) the program is not "graduating" significant numbers of contractors into the private surety bonding market; and (4) SBA is not providing management assistance to surety bond guarantee program contractors. From its findings, GAO concluded that for SBA to strengthen its management of the Surety Bond Guarantee Program it needed to: (1) develop underwriting guidelines to assist program personnel and surety companies in evaluating contractors' surety bond guarantee applications and require program officers to verify the data contained in selected contractor applications; (2) direct program officers to decline applications with outdated, inaccurate, inconsistent, or incomplete underwriting data and to refuse to do business with agents who repeatedly submit unreliable data; (3) establish and enforce guidelines regarding surety responsibilities for monitoring contractor progress and preventing defaults; (4) establish a claims-handling reimbursement rate(s) which will result in a reasonable and equivalent net claims-handling cost for the two types of sureties in the program; (5) establish a systematic procedure for indepth verification of selected surety company claims; (6) establish graduation criteria and procedures for formally encouraging and assisting contractors to obtain private bonding and place incentives on the surety companies to graduate contractors; and (7) identify the management assistance needs of surety bond guarantee contractors and provide timely and adequate management assistance to them.