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What's New: Government Affairs

SBA Bond Guarantee Program Revisions -­ Final Rule

Wednesday, January 15, 2014  

The U.S. Small Business Administration (SBA) has issued a final rule to amend the existing regulations for the Surety Bond Guarantee Program (BGP) to implement provisions enacted under the National Defense Authorization Act for Fiscal Year 2013 (NDAA). With the exception of some clarifications, the final rule has been adopted as proposed. The final rule implements the statutory increase in the maximum contract amount for which the SBA can guarantee a bond from $2 million to $6.5 million, as adjusted for inflation in accordance with 41 U.S.C. 1908. The final rule also implements the new law’s increase in the contract amount for which SBA is authorized to guarantee bonds to $10 million if a federal contracting officer provides certification that the guarantee is necessary for the small business to obtain bonding. The law also grants the SBA the authority to partially deny liability under its bond guarantee. SBA also is prohibited from denying liability based on material information that was provided as part of the guarantee application in the Prior Approval Program under the new law. The existing regulations have been revised to include these provisions. SBA made a clarification in the final rule to the provision as proposed by revising the language to make it clear that the material information must have been provided to SBA in the surety’s application.

The SBA received comments on the proposed increases in the dollar thresholds noting that a surety may not be in a position to notify SBA or seek SBA’s approval when a change order exceeds the dollar threshold because a surety may be required contractually to waive notice of contract amount changes. SBA states in the final rule notice that a Prior Approval Surety must notify SBA of any required changes in the contract or bond amount that aggregate 25% or $100,000 under the final rule "as soon as the surety acquires knowledge of the change.” The surety is required to provide notice to SBA under this provision upon acquiring knowledge of these aggregated changes. SBA notes that the existing regulations require surety companies to monitor the principal’s progress on bonded contracts guaranteed by SBA. The SBA states that it would expect the surety to be aware of changes in the contract or bond amounts. The comments also stated that SBA now has the discretion to deny liability in whole or in part. The comments recommended that SBA propose regulations to address the use of such discretion where the Surety does not obtain approval or notify SBA of the change in the contract or bond amount. The SBA states that the exercise of its discretion must be based on the circumstances of each case and that it will be determined on a case-­‐by-­‐case basis.

SBA also is making additional changes to the BGP regulations concerning certain SBA practices under the program, as well as certain technical revisions. For the Quick Bond program, the prior regulations provided that the Quick Bond Application and Agreement (SBA Form 990A) may not be used for any contract that includes a warranty/maintenance period exceeding 12 months. SBA noted in the Notice of Proposed Rulemaking (NPRM) that this is conflict with another existing provision that allows for the contract to include a maintenance agreement of two years or less for defective workmanship or materials only and allows for longer maintenance agreements and additional coverage with SBA’s written approval. The final rule deletes the 12-­‐month warranty/maintenance exclusion. Prior regulations also prohibited SBA Form 990A from being used if the contract includes a provision for liquidated damages that exceed $250 per day. The final rule increases the amount to $1,000 per day. In the NPRM, SBA stated that it "received suggestions from the surety industry for this increase, which is consistent with industry standards for a streamlined application process.”

SBA also has amended the regulations to change the dollar threshold for determining when a change in the contract or bond amounts may result in denial of liability or requires other actions. Under the prior regulation, the threshold for a change in the contract or bond amount is a change of 25% or $50,000, whichever is less. The final rule increases threshold to $100,000 in certain cases. SBA is relieved of liability if the surety has committed a material breach of one or more terms or conditions of its agreement with SBA, which occurs if the breach causes an increase of at least 25% or $50,000. SBA also is relieved of liability if the surety has committed a substantial violation of SBA regulations, which is defined as a violation causing an increase of at least 25% or $50,000 in the aggregate. The regulations also relieve the SBA of liability if the surety agrees to or acquiesces in any material alteration in the terms, conditions, or provisions of the bond. For a Prior Approval Surety, an alteration includes any increase of at least 25% or $50,000. Existing regulations provide that a Prior Approval Surety must notify SBA of any increases or decreases in the contract or bond amount that aggregate 25% or $50,000 as soon as the surety acquires knowledge of the change, and also must obtain SBA’s prior written approval of an increase in the original bond amount as a result of a single change order of at least 25% or $50,000. The regulations provide that Preferred Surety Bond Program (PSB) Sureties must pay the additional fees due from the Principal and the surety on increases aggregating 25% of the contract or bond amount or $50,000. Under the final rule, these thresholds will be increased to $100,000. SBA explained in the NPRM that the $50,000 threshold is always the lesser amount for contracts that are greater than $200,000, and the average amount of a contract is now approximately twice this amount.

The final rule makes changes with regard to subcontracts as well. Existing regulations provide that the SBA will not guarantee bonds for principals "who are primarily brokers or who have effectively transferred control over the project to one or more subcontractors.” In the NPRM, SBA explained that "surety companies and agents have questioned the meaning of the phrase ‘effectively transferred control over the project.’” SBA has revised this provision to clarify that, to be eligible for a bond guaranteed by SBA, the principal must retain full responsibility for the oversight and management of the contract, including any work performed by a subcontractor, and may not subcontract the full scope of the statement of work. In the NPRM, the SBA explained that many small general contractors may subcontract a large amount of the work on a project, but also noted its concerns with subcontracting, including certain cases in which the principal is a front for the subcontractor.

The final rule revises certain time frames for taking certain actions. Existing regulations provide that a surety is required to pursue salvage and recovery, and SBA is entitled to its guaranteed percentage of it. The surety is required to reimburse or credit the SBA within 90 days of receipt of any recovery, which the final rule reduced this to 45 days. The final rule also reduces the timeframe for the surety to pay SBA its share of any settlement amount under the regulations from 90 days to 45 days. The regulations provided that the SBA pays its share of the loss to both the Prior Approval Surety and the PSB Surety within 90 days of receipt of the required information. The final rule reduces this to 45 days. Existing regulations also provide that both the Prior Approval Surety and the PSB Surety must submit to SBA a claim for reimbursement for losses paid by the surety within 1 year from the time of each disbursement. The final rule reduces this to 90 days. SBA explained that the changes are being made due to the increased use of electronic communications and claims submissions.

Existing regulations provide that SBA will reimburse a PSB Surety for the guaranteed portion of payments the surety makes for avoiding an imminent breach of the terms of a contract. The regulations also provide that the PSB Surety does not need SBA approval to make these payments. The regulations also provide that the aggregate of the payments by SBA cannot exceed 10% of the contract amount, unless SBA finds that a greater payment is "necessary and reasonable.” For payments exceeding 10% of the contract amount, the proposed rules would permit a PSB Surety to have the opportunity to request that SBA approve the amount prior to the surety making the imminent breach payment. Under the final rule, the SBA will approve the payment if it finds that the payment is necessary and reasonable. Further, the final rule provides that if the surety does not request prior SBA approval, SBA is permitted to refuse to reimburse the surety if SBA found that the payment that exceeds 10% of the contract amount was not necessary and reasonable.

The final rule deletes the reference to the "Contract Bonds” section of the current "Manual of Rules, Procedures and Classifications of the Surety Association of America.” The final rule specifies that commercial and fidelity bonds are not eligible for an SBA guarantee. The final rule eliminates expired provisions that were authorized under the American Recovery and Reinvestment Act of 2009.

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