Small Business

Federal law requires contractors to provide surety bonds on all federal construction contracts worth more than $25,000. Surety bonds guarantee that should a bonded contractor default, a construction project will be completed and the contractor's employees and material suppliers will be paid. Most state and local governments and some private sector lenders also require construction firms to be bonded. Some small construction firms argue that surety companies' decisions to approve or deny bonds can seem arbitrary and can impede the growth of small firms, especially those owned by women and minorities. Because limited data exist on this issue, GAO surveyed a random sample of 12,000 construction firms, of which about 98 percent were small enough to qualify for Small Business Administration programs. GAO focused on the (1) firms' overall rate of obtaining bonds; (2) characteristics of the small firms that did bonded work; (3) recent experiences of these firms in obtaining bonds; and (4) characteristics of those firms that did not perform bonded work, including their reasons for not doing such work. The first volume (GAO/RCED-95-173FS) discusses the survey results in detail. The second volume (GAO/RCED-95-173S) provides detailed statistics on the experiences of small construction firms.

GAO found that: (1) 7.2 percent of the minority-owned firms surveyed had obtained surety bonds before 1990; (2) the minority-owned firms tend to be smaller, have less construction experience, and are more likely to have obtained their first bond before 1990; (3) minority- and women-owned firms were routinely asked to provide certain types of financial documentation and collateral to obtain a bond; (4) minority-owned firms were more likely to have been denied surety bonds, and often lost opportunities to bid for bonds because of the length of time it took to obtain a bond; (5) the minority and women-owned firms that did not obtain surety bonds were usually not required to have bonds; and (6) the minority and women-owned firms surveyed rarely bid on projects that required bonding.