Detailed Information on the
Small Business Surety Bonds Assessment

The Office of Surety Guarantees is planning to award a contract in FY2008 to study reinsurance industry and identify opportunities for the SBA program to adopt sound industry practices, including risk assessment and risk management processes and procedures. Statutory and regulatory changes are envisioned during FY 09 as part of in-depth program restructuring.

Restructure field component of the program and link district office goals to program performance.

Implement internet-based application and claims processing system.

Undertake evaluation of program effectiveness.

Measure: Cost per Bond Guarantee

Explanation:The cost per bond in FY 2005 exceeded the target since program activity levels decreased.

Measure: Number of bonds guaranteed for existing small businesses.

Explanation:The targets for FY 2006 & 2007 were reassessed based upon program activity.

Is the program purpose clear?

Explanation: The purpose of the program is to assist small, disadvantaged, and competitive opportunity gap contractors obtain bonding for public and private contracts. This program fills the bond credit gap and provides incentives for sureties (companies that guarantee the performance of a contractor) to bond contractors that are skilled, but lack the financial strength or bonded track record to reasonably obtain bonding in the standard market.

Evidence: Part B of Title IV of the Small Business Investment Act or 1958, as amended. The Small Business Investment Act specifies that to receive SBA's bond guarantee, a person "is not able to obtain such bond on reasonable terms and conditons without a guarantee".

Does the program address a specific and existing problem, interest, or need?

Explanation: The Miller Act requires bonding on Federal contracts over $100,000, and most state, lcoal and private contracts also require bonds.The Surety Bond Guarantee (SBG) program addresses the need of small and emerging contractors to obtain the bonding necessary for them to bid and compete in the contracting industry. Since surety companies are sometimes unwilling to assume 100% of the risk of bonding these contractors, SBA's guarantee provides the needed incentive.

Evidence: SBA serves a different segment of the market than standard surety companies that generally bond larger contractors whose contracts exceed $1 million. In FY 2004, the average contract amount in the SBG program was approximately $270,000. SBA guaranteed 5,573 bid bonds for an estimated contract value of $1.7 billion and 2,230 final bonds for a contract amount of $598 million. The Surety Association of America (SAA), a trade association with 500 members, promotes the SBG program in literature, slide presentations, and its own SBG program brochure. Millier Act (40 U.S.C. 270a) as amended; Management Information Summary Report; Contractor's Executive, Surety Bonding, November 2004; 5 of the top 10 sureties are in the SBG program.

Is the program designed so that it is not redundant or duplicative of any other Federal, state, local or private effort?

Explanation: The only other Federal bond guarantee program is the Department of Transportation's (DOT) Bonding Assistance program. Under that program, the bonds must be issued for transportation related contracts and on behalf of certified minority, women-owned, and disadvantaged businesses. SBA guarantees bonds for construction, service, and supply contracts not exceeding $2 million. SBA assistance is not limited to minority, women-owned, and disadvantaged contractors. Although most states have "Little Miller Acts", few have bonding assistance programs. There are no similar programs in the private sector.

Evidence: Public Law 97-449 , 49 U.S.C. 332 authorizes the DOT program. In the last three fiscal years, DOT guaranteed an average of 70 performance and payment bonds, averaging $15 million per year in contract value. In the last three fiscal years, SBA has guaranteed an average of 2,250 performance and payment bonds, averaging $551 million per year in contract value.

Is the program design free of major flaws that would limit the program's effectiveness or efficiency?

Explanation: The agency has identified program enhancements needed to maximize its effectiveness and achieve performance goals. In particular, the Office of Surety Guarantee (OSG) has developed a Capital Asset Plan for a new, Internet-based electronic application and claims processing system which would enhance program efficiency. SBA has proposed a restructuring plan to strengthen the field component of the program by utilizing the 66 district offices and district office goals to conduct marketing and outreach. Currently, the 4 area offices can only market the program in the districts where they are located, which impacts the program's ability to meet its strategic goals for FY 2005-2008. Lastly, SBA is developing a strategic marketing plan to increase the program's effectiveness in reaching more existing and competitive opportunity gap contractors.

Evidence: Capital Asset Plan;SBA 606; SBG Program Strategic Marketing Plan

Is the program design effectively targeted so that resources will address the program's purpose directly and will reach intended beneficiaries?

Explanation: The SBG program targets small, competitive opportunity gap contractors that meet program size eligiblity requirements and are unable to secure bonding on reasonable terms in the standard surety market. Generally, the small businesses lack the financial strength and prior bonding experience needed for sureties to assume 100% of the risk. These contractors must certify that bonding is unavailable on reasonable terms.

Evidence: The Small Business Act specifies that to receive SBA's bond guarantee a person "is not able to obtain such bond on reasonable terms and conditons without a guarantee". Contractors must cerify that they tried and failed to obtain required bonds without SBA's guarantee. Sureties must certify that the contractor falls below the normal company underwriting standards, and that it will not issue bonds without SBA's guarantee.

Does the program have a limited number of specific long-term performance measures that focus on outcomes and meaningfully reflect the purpose of the program?

Explanation: The SBG program contributes to two long-term objectives (LTO's) under SBA's Strategic Plan, Goal 2. Those LTO's are to maximize the sustainability and growth of exisiting businesses and competitive opportunity gap facing businesses. Performance measures attached to these LTO's include the number of businesses assisted and their longevity. The survivability rate, job creation, and revenue growth of SBG assisted businesses will be compared to the national average. SBA has contracted with the Urban Insititute to measure the impact of its programs, including SBG, in 2006.

Evidence: Strategic Plan; Performance and Accountability Report; Agency Scorecard; FY 2006 Budget Submission.

Does the program have ambitious targets and timeframes for its long-term measures?

Explanation: SBA is developing baselines from which to measure the programs long-term outcomes specified in the previous question. In SBA's FY 2003-2008 Strategic Plan, the SBG program goal is to increase surety bond guarantee assistance by 10% per year. These long-term output-oriented performance measures will contribute to the sustainability and growth of exisiting and competitive opportunity gap facing businesses by increasing their contract revenue and job creation rates. The SBG program routinely tracks the number of surety bond guarantees approved, contract revenue, and the number of jobs created to measure its progress toward achieving program long-term outcomes.

Evidence: SBA's Strategic Plan; FY 2004 Performance and Accountability Report; Agency Scorecard

Does the program have a limited number of specific annual performance measures that can demonstrate progress toward achieving the program's long-term goals?

Explanation: The SBG program has specific values assigned for annual targets. In FY 2002, SBA approved 7,372 bond guarantees, which exceeded its goal of 6,633 by 11%. In FY 2003, SBA guaranteed 8,974 bonds, exceeding its goal of 8,000 by 12%. SBA guaranteed 7,803 bonds in FY 2004, not meeting its goal of 9,900. Legislation for the Preferred Surety Bond (PSB) program expired in June of 2004, and the program was not made permanent until December of 2004.

Evidence: The FY 2004 Performance and Accountability Report contains information on program goals. Annual budget submissions and the Agency Scorecard contain annual performance goals.

Does the program have baselines and ambitious targets for its annual measures?

Explanation: Annual SBG program performance targets are based upon the prior year's program activity and projected resource availability. In FY 2002, the program goal for the number of bonds approved was 6,633, and the actual number of bonds approved was 7,372. The goal for FY 2003 was 8,000, which was an approximate increase of 10% over the previous fiscal year actual amount. The program goal for FY 2004 was 9,900, which was a 10% increase over the FY 2003 actual of 8,974. The FY 2004 goal was not met due to lack of Preferred Surety Bond program reauthorization.

Evidence: FY 2004 Performance and Accountability Report; Agency Scorecard

Do all partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) commit to and work toward the annual and/or long-term goals of the program?

Explanation: Participating sureties are using the SBG program to bond small contractors that do not meet their conventional underwriting standards. Program marketing and outreach to surety partners and small businesses at the district office level is critical to SBA's success in meeting SBG program performance goals. As part ot the Goals Team, the Office of Capital Access (OCA) participates in the establishment of district office goals and coordinates efforts to meet annual and long-term performance goals. As part of the Office of Surety Guarantee's (OSG's) proposed restructuring plan (See 1.4), surety bond goals would be established for each district office. The process to set SBG district office goals is currently being formalized.

Evidence: The Goals Team meets annually to establish district office goals, which are tracked through the Agency Scorecard. The performance of the district offices is measured against their goals annually, and a rank is established according to their success in achieving their goals. SBG database reports; Surety Audit/Compliance Review reports; PSB Agreements.

Are independent evaluations of sufficient scope and quality conducted on a regular basis or as needed to support program improvements and evaluate effectiveness and relevance to the problem, interest, or need?

Explanation: In September of 2000, SBA's Office of the Inspector General (OIG) issued a report titled "Results Act Performance Measurement for the Surety Bond Guarantee Program". SBA developed program performance measures in conjunction with OIG's reommendations. The OIG has regularly conducted audits of participating surety companies. Based upon audit findings and recommendations, SBA has changed program policies and is amending program regulations. SBA is contracting with the Urban Insititiute to study the impact of its programs, including SBG, in 2006.

Evidence: OIG Audit Report #0-26, Urban Institute contract.

Are Budget requests explicitly tied to accomplishment of the annual and long-term performance goals, and are the resource needs presented in a complete and transparent manner in the program's budget?

Explanation: Budget requests are tied to accomplishment of annual and long term performance goals. Since program inception, annual funding has been closely aligned with programmatic function. Specifically, Surety Bond Program budget requests support the Agency's Strategic Goal 2, Increase small business success by bridging competitive opportunity gaps facing entrepreneurs, and Long Term Objective 2.3, Significantly increase successful small business ownership within segments of society. The Agency has engaged in full allocation of costs in formulation of its budget estimates for several years.

Evidence: U.S. Small Business Administration Congressional Submission Fiscal Year 2006, Budget Request & Performance Plan; U.S. Small Business Administration Performance and Accountability Report, FY2004; and U.S. Small Business Administration Scorecard.

Has the program taken meaningful steps to correct its strategic planning deficiencies?

Explanation: The SBG program is included in SBA's Five Year Strategic Plan, which supports the President's Management Agenda. The Strategic Plan focuses on assisting existing businesses, increasing revenues, job creaton, and reaching underserved markets.

Evidence: SBA's Five Year Strategic Plan

Does the agency regularly collect timely and credible performance information, including information from key program partners, and use it to manage the program and improve performance?

Explanation: Historic program data was collected and used to establish future program performance targets. The SBG program collects data daily, which is used to monitor progress toward program goals and to evaluate program efficiency. Credible information concerning underwriting activity, surety particpation, and claims processing is used by program management to identify program strengths and weaknesses, and improve program performance.

Evidence: Managment Information Summary Report; SBG Database Reports; Cognos Report Module.

Are Federal managers and program partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) held accountable for cost, schedule and performance results?

Explanation: SBG employees' personnel appraisal requirements are directly linked to program goals and Agency objectives. All sureties are required to submit contractor graduation plans and minority outreach plans, which contribute to increasing contractors' bonding capacity and to growing their businesses. SBG regulations include a provision for removing non-performing sureties from the program or reducing their guarantee percentage. OSG has proposed a field office restructuring plan necessary to achieve performance targets. Under the plan, all SBA district offices would have SBG program goals and would market the program in a wider geographical area.

Evidence: 13 CFR, Part 115; Personal Business Commitment Plans

Are funds (Federal and partners') obligated in a timely manner and spent for the intended purpose?

Explanation: All operating budget obligations are input into and monitored through the Oracle Federal Financials system. Supporting documentation is routinely compared to Oracle data to assure accuracy. OSG allocates guarantee authority quarterly, and monitors it daily. Sureties and area offices manage their guarantee authority through the allotment system.

Evidence: Oracle reports; SBG Database Reports, FY 2004 Performance Accountability Report.

Does the program have procedures (e.g. competitive sourcing/cost comparisons, IT improvements, appropriate incentives) to measure and achieve efficiencies and cost effectiveness in program execution?

Explanation: The SBG program is included in the Cost Allocation Model that SBA has implemented. A cost per bond is calculated using information from that model, and is included in the annaul Performance and Accountablilty Report. SBA is seeking to fund a Web-based application and claims processing system that would significantly improve program efficiency by reducing application and claims processing time by an estimated 50%. It is anticipated that a reduction in the cost per bond guarantee would result.

Evidence: Cost Allocation Model; Performance and Accountability Report; Capital Asset Plan.

Does the program collaborate and coordinate effectively with related programs?

Explanation: The SBG program is specialized and is not directly related to other SBA programs. The Office of Surety Guarantee (OSG) coordinates marketing and outreach with the Office of Government Contracting, the Office of Financial Assistance, and the HUBZone program to provide complete SBA assistance options for small contractors.

Evidence: SBG program brochure and website.

Does the program use strong financial management practices?

Explanation: Agency audits have not identified any internal control weaknesses in the program. To minimize erroneous claim payments, OSG performs case file analyses and examines surety expense and loss supporting documentation prior to payment. Initial claim payment approvals require three signatures and subsequent payment approvals require two signatures with delegated authority. Database controls are in place to identify duplicative payments. Surety audits and compliance reviews are conducted to ensure claim request and payment validity.

Evidence: Standard Operating Procedures; SBG Database Reports; Cognos Report Module

Has the program taken meaningful steps to address its management deficiencies?

Explanation: In order to improve the performance of the program, SBA has developed a capital asset plan for a new, internet-based electronic application and claim processing system which would significantly enhance program efficiency. Management has also proposed a restructuring plan to strengthen the field component of the program by utilizing the agency's District Office network.

Evidence: Managment Information Summary; SBG Database Reports; Audit and Compliance Review Reports

Has the program demonstrated adequate progress in achieving its long-term performance goals?

Explanation: In FY 2003, the SBG program made substantial progress toward its long-term output goals in the Agency's 2003-2008 Strategic Plan. SBA guaranteed 8,974 bonds, surpassing its goal by 12%.This activity represented $594 million in contract revenue and 5,123 jobs created. Although a temporary expiration of the PSB program prohibited the program from reaching its FY 2004 goals, SBA guaranteed 7,803 bonds, which represented $598 million in contract revenue and 5,154 jobs created. The contract revenue and jobs created should contribute to the survivability and growth of the small contractors that received SBG assistance. Long-term outcomes will be measured in the upcoming program evaluation.

Evidence: Strategic Plan; Performance and Accountability Report; Agency Scorecard.

Does the program (including program partners) achieve its annual performance goals?

Explanation: The SBG program has contributed to the Agency's objective of maximizing the sustainability and growth of small businesses. In fiscal years 2001, 2002, and 2003, the number of bonds guaranteed through the program steadily increased. The SBG program exceeded its annual performance goals by 1% in FY 2001, 11% in FY 2002, and 12% in FY 2003. The SBG program did not achieve its FY 2004 goals. The Preferred Surety Bond (PSB) program, which previously did approximatley 40% of total program activity, expired in June of 2004 and was not made permanent until December of 2004. Excluding the statutory authority problem -- which was eventually rectified -- the program has routinely met its annual goals.

Evidence: Strategic Plan; Performance and Accountabillity Report; Agency Scorecard; Agency Management Information Summary (MIS Report).

Does the program demonstrate improved efficiencies or cost effectiveness in achieving program goals each year?

Explanation: In fiscal years 2002 and 2003, the SBG program achieved its goals within its guarantee authority and operating budget. The program's cost per bond decreased from $570 in 2002 to $408 in 2003. In fiscal year 2004, the program's cost per bond increased slightly to $489 since the program activity significantly decreased with the expiration of the PSB program. SBA has included a funding request for an SBG Web Application System in its FY 2006 Congressional Submission. This system would improve program efficiency and would provide program services any time. Under the electronic system, SBA anticipates that customers would benefit from a 50% decrease in SBG application processing time from 14 to 7 days. Claims processing time would also decrease by 50%, from 90 days to 45 days. SBA has proposed a restructuring of the program's field component and has developed a SBG Program Marketing Plan. Both are designed to improve program awareness, marketing, and delivery to more small contractors nationwide. Estimated quantitative results are outlined in the Strategic Plan.

Evidence: Strategic Plan; Performance and Accountability Report; Agency Scorecard.

Does the performance of this program compare favorably to other programs, including government, private, etc., with similar purpose and goals?

Explanation: The SBG program exceeds the U.S. Department of Transportation's bond guarantee program in its capacity to assist contractors in obtaining bonding. DOT's program provides 80% bond guarantees for transportation-related contracts up to $1 million on behalf of certified minority, women-owned, and disadvantaged businesses. DOT's program lacks funding and has no supporting regulations. Most state bond programs are only able to guarantee contracts between $100,000 - $500,000 maximum. However, the SBG program provides a 70 - 90% bond guarantee on bonds for public and private construction, service, and supply contracts up to $2 million on behalf of small businesses. The few existing state programs are unable to widely assist contractors because they too are limited in scope (contract type and dollar value supported) and often have funding issues. Additionally, the SBG program compares favorably to the surety industry as it relates to program loss rates. Private industry loss rates on non-SBA bonds are typically higher than the SBG program loss rates.

Evidence: In the last 3 years, DOT guaranteed an average of 70 performance and payment bonds for an average contract amount of $15 million/year. However, SBA in the past 3 years, has guaranteed an average of 2,251 performance and payment bonds, averaging $551 million/year in contract value. The SBG Program loss rate for 2004 was 1.85%, while the average industry loss rate among the top 100 private surety writers was over 30% for the same period. The 2004 Surety Association of America Top 100 Writers of Surety Bonds Report

Do independent evaluations of sufficient scope and quality indicate that the program is effective and achieving results?

Explanation: While not considered independent, two industry surveys demonstrate the need for the SBG program and areas of improvement. SBA is contracting with the Urban Institute to conduct a study of the effectiveness and impact of its programs. The long-term strategy of the Agency is to continue studying its programs. SBA has included a $1 million request for this purpose in its FY 2006 budget submission. It is anticipated that the SBG Program will be part of this study.

Evidence: FY 2006 Budget Submission National Association of Surety Bond Producers (NASBP) and Surety Association of America (SAA) surveys.