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Small & Emerging Contractors


What's New: Government Affairs

House Subcommittee Conducts Oversight Hearing on Contracting Issues

Wednesday, May 29, 2013  

The Contracting and Work Force Subcommittee of the House Small Business Committee conducted an oversight hearing on the contracting issues that the Committee wants to address this year: H.R. 776 individual surety; 90% bond guarantees for the preferred bond guarantee program of the Small Business Administration (SBA), elimination of reverse auctions for construction projects, credit for subcontracting goals for contacts in lower tiers and current agency design build regulations that make it prohibitive for small contractors to bid because of the cost of bid and proposal packages.

H.R. 776 is the individual surety legislation that passed the House last year, but stalled in the Senate. The bill would require individual sureties that pledge assets for contractors in lieu of a corporate surety bond to pledge assets that readily identifiable, easy to verify and readily convertible into cash and to put such assets under the control of the contracting officer. This is what the contractor would be required to do if the contractor pledged its own assets in lieu of a bond. The bill that has been reintroduced this year also would increase the maximum bond guarantee in the SBA’s preferred surety program from 70% to 90%.

Mark McCallum of NASBP testified at the Subcommittee hearing. NASBP told the Subcommittee that H.R. 776 would protect of small contractors who are the most hurt when assets backing a payment bond do not exist or are insufficient. NASBP also stated that it is not clear if and how often federal contracting officers receive specific training to understand and to perform the needed tasks of examination concerning individual sureties. In addition, the witness for the Army Corps of Engineers stated that individual surety bonds are an administrative burden and expense. The Corps said that individual sureties bonds were provided far less frequently than corporate surety bonds and that the Corps has rejected most of them. The Corps written testimony stated that small contractors are particularly vulnerable to individual sureties because the surety industry is highly concentrated, with much of the market controlled by a dozen sureties.

The main concern expressed about the 90% SBA bond guarantee was whether it was going to cost the SBA more and how the SBA would manage the greater exposure. The SBA testimony made it clear that SBA could absorb any additional cost within its current funding. The SBA noted that the default rate was low and that there was little difference between the default ratios of the preferred and prior approval plans and that the default rates were relatively low. SBA stated that the premium volume has shrunk in the preferred surety program. Half of the bond program’s premium volume used to come from the preferred program, and that now is down to 14%. In response to questions, NASBP stated that the increase in the bond guarantee to 90% would encourage more sureties to participate in that program.

H.R. 776 was referred to both the House Judiciary and Small Business Committee. Judiciary has legislative jurisdiction over the individual surety provisions and Small Business has jurisdiction over the SBA bond guarantees. This bill likely would not pass as a standalone bill. Rather it needs to be incorporated into another piece of moving legislation. The consent of both committees will be needed to move the bill in the House regardless of the vehicle.

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