The Surety Bond Guarantee Program:

Significant Changes Are Needed in its Management

CED-80-34: Published: Dec 27, 1979. Publicly Released: Feb 11, 1980.

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The Surety Bond Guarantee Program of the Small Business Administration (SBA) was established to guarantee up to 90 percent of a surety company's losses on bonds issued to small businesses which could not obtain bonding without the guarantee. From its inception in 1971, the program guaranteed more than 91,000 contracts totaling $6.3 billion. GAO evaluated the management of the program.

SBA has not managed the Surety Bond Guarantee Program satisfactorily. GAO identified four principle problem areas. First, SBA approved most bond guarantee applications on the basis of limited reviews of incomplete or erroneous underwriting data. As a result of this practice, SBA-guaranteed contractors defaulted on about 5,600 contracts. Second, SBA and participating sureties made little effort to minimize losses by attempting to prevent contractor defaults. Dealing with sureties which specialize in writing SBA-guaranteed bonds raised the costs of defaults to SBA since most specialty sureties do not have the capability to handle claims internally; the cost of claims handled by outside attorneys was charged to SBA. Third, the program has not significantly contributed toward graduating contractors into the private bonding market. This has been due to a failure to encourage graduation, a reluctance on the part of specialty sureties to issue bonds without SBA guarantees, and the failure of SBA to establish guidelines regarding contractor graduation. Fourth, SBA did not identify the need for management assistance or provide assistance to program contractors; rather, program officials responded only to infrequent requests for assistance.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Administrator, SBA, should establish and enforce guidelines regarding safety responsibilities in the areas of monitoring contractor progress and preventing defaults.

    Agency Affected: Small Business Administration

  2. Status: Closed - Not Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Administrator, SBA, should analyze the net claims-handling costs for the two types of sureties in the program, those that have an internal claims-handling capability and those that do not. Based on the results of this analysis, the Administrator should revise the reimbursement rate to a level which will result in a reasonable and equivalent net claims-handling cost for all sureties regardless of whether they have an internal claims-handling capability.

    Agency Affected: Small Business Administration

  3. Status: Closed - Not Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Administrator, SBA, should: (1) develop a method for identifying the management assistance needs of Surety Bond Guarantee Program contractors; and (2) provide timely and adequate management assistance to them. The Administrator should consider approving certain bond guarantees only if the contractor is willing to accept SBA management assistance.

    Agency Affected: Small Business Administration

  4. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Administrator, SBA, should: (1) develop underwriting guidelines to assist program personnel and surety companies in evaluating contractors' surety bond applications; (2) establish procedures for program officers to conduct indepth verifications and evaluation of selected contractor applications; and (3) direct program officers to decline applications with erroneous data and refuse to do business with those agents who repeatedly submit unreliable data.

    Agency Affected: Small Business Administration

 

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