Stimulus Funds To Refund Surety Bond Premiums

The Federal Stimulus fund will refund surety bond premiums for contractors ARRA transportation infrastructure contracts.

“This new program, which will be administered by the Department of Transportation’s Office of Small and Disadvantaged Business Utilization (OSDBU), allows small and disadvantaged businesses to apply to be reimbursed for bonding premiums and fees incurred when competing for, or performing on, transportation infrastructure projects funded by ARRA. The program will be especially helpful for businesses with traditionally less working capital than larger contractors.”

The headline sure catches the eye, but how realistic is it? According to the site, only “small and disadvantaged businesses” can apply. When you read further down, it seems that they classify these businesses by their low working capital; one of the main items looked at when reviewing a contractor’s surety capacity.

Fortunately, it does allow the SBA bonded contractors to apply. However, SBA contractors’ bond lines are often reduced due to their lines of credit being reduced or terminated (SBA counts LOCs as working capital).

In other words, the government is willing to provide stimulus funds to refund contractors’ bond premiums, but only for contractors that don’t actually qualify for surety bonding.


Eric is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry, he is also a contributing author to the surety bond blog.

9 Comments

Bryan_Kelly

The DOT used to have a surety guarantee program similar to the SBA for contractors working on transportation-related projects. Just reading this quickly, I'm guessing it's related to something like that.

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Michael Weisbrot

Interesting. I wasn't aware that the DOT or any other government department ever offered anything like the SBA.

It just goes to show, there is always something new to learn in our oddball industry!

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Michael D. Williams

The US DOT had a similar program to the SBA but not as comprehensive as it only provided a guarantee on US DOT contracts which did include buildings, roads, bike pathways or anything the US DOT was involved in. However, it only went up to $1 million versus the old SBA program at $2 million and the guarantee was only 70% versus 80-90% under the SBA program. Collecting on claims was another issue. The program was administered out of Washington DC by Art Jackson.

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Michael D. Williams

This new reimbursement as I understand is to help small and disadvantaged contractors compete on price. Since they are deemed to have higher premiums, it is believed that profit margins are reduced to compete since larger and stronger accounts would certainly have a lower rate, especially as this applies to supply contracts. We see it as a probable win when bonding these clients with escrow as the reimbursement can be captured in an escrow account by the surety and used as additional collateral cushion when providing bonds. That is provided the surety uses the tool of funds control/escrow. In addition, to the reimbursement, and you might want to check your state, some funds are being set aside to create a potential working capital pool to aid small and disadvantaged contractors in covering costs associated with the timing difference between work being performed and the actual payment being received. Again with funds control/escrow, this might aid in the approval process for suretyship either through the US SBA surety bond guarantee program or as collateral for specialty surety company.

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Michael Weisbrot

Michael,

You bring up some excellent points, but how does it help the contractor be more competitive if it is a reimbursement? It certainly won't allow them to bid lower. I'm not sure many contractors (or agents) would have the foresight to make use of funds control for better bond programs. Also, would the reimbursement really be enough in escrow to make a difference? Surely the contractor would have to contribute further funds.

I've never dealt with contract surety much myself, so thank you for your input.

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Jeff

I'm a two year young construction business in California and have a couple of questions.

1. I am "Self certified small disadvantaged". Does that qualify me for DOT's small disadvantaged?

2. I, like other small, emerging companies, am looking for ways to increase my bonding capacity with little working capital (it's going back into the business for equipment, etc. while I'm getting established). One of the bloggers referenced some states forming working capital pools. Does anyone know if this has been done in California? If so, what are the particulars?

Thanks for any assistance.

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