New Regulatory Incentives to Help Small Businesses

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A Small Business Administration rule would increase the availability of contracts for small businesses.

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An article from April 2016 at the Government Executive highlighted the fact that government agencies had awarded $91 billion in government contracts for small businesses and contractors during the 2015 fiscal year. As such, they have exceeded their pre-set goals and directed about 25.75% of the federal spend toward small businesses. According to the Small Business Administration (SBA), this was the third consecutive year in which the government had reached and surpassed its targets, significantly strengthening small businesses and supporting millions of jobs.

Although this is great news, it was not too long ago that the SBA claimed to have surpassed its goal, only for a number of uncomfortable revelations to shake up those claims. Back in 2014, serious violations and malpractices were found to be pestering the SBA, after about $400 million in funds were found to have been awarded to ineligible contractors.

No such news has made headlines so far this year, and hopefully none will. Instead, there has been news of regulatory amendments intended to increase the availability and accessibility of federal and state contracts created for small businesses. One such amendment is the introduction of a government-wide mentor-protégé program, which is expected to receive its final rule before the end of the summer. If enforced, the amendment will establish a program that would make government contracts for small businesses available to other groups that are not currently included in the mentor-protégé program.

The current program only affords its benefits to “8(a) companies.” An 8(a) company is a firm that is “owned and controlled at least 51% by socially and economically disadvantaged individuals.”

The new structure would allow both the former program and the new one to coexist. The old program would continue to perform its original function unchanged, while the new program would provide opportunities for other small businesses to benefit from the mentor-protégé model. These small businesses include Historically Underutilized Business Zones (HUBZone) companies, Women Owned Small Businesses (including Economically Disadvantaged Women Owned Small Businesses), and Service Disabled Veteran Owned businesses.

In addition to the federal mentor programs, there are also state-based mentor programs, which are supported by local construction industry organizations. For example, there are several initiatives backed by the Associate General Contractors of Michigan, such as the Regional Union Construction Center and the Contractor Loan Fund in St. Louis, or the Indiana Construction Roundtable Diversity Initiative Program, which has its own mentor-protégé program supporting local contractors in the construction business.

Other regulatory programs, that target the bonding process, have also been created to increase the chances for construction contractors to win government contracts. Bonding is the process during which a contractor obtains a surety bond from a surety company. This gives the bond obligee (the state or the construction project owner) a guarantee that the contractor is licensed and will comply with state regulations. Should the contractor violate the contract’s terms, a claim can be filed against the bond and the obligee is compensated by the surety for any losses.

Although bonding is a central element of construction contracting, small business contractors often have a hard time getting bonded due to a number of financial or organizational constraints, such as the requirement for a fairly high personal credit score of the contractor. Moreover, contractors without the relevant construction bonds are not allowed to participate in bids or perform work on federal or state construction contracts, particularly on those upward of $150,000.

New regulatory mechanisms attempt to alleviate this process by making bonding simpler and improve chances to win federal and state government contracts. So-called “surety bond guarantee” programs have been created to assist small contractors obtain their payment or performance bond more easily. These programs can be found both on the federal and the state level.

On the federal level, this initiative is represented by the SBA Surety Bond Guarantee Program (SBG), which supplies surety bond guarantees for qualified small and emerging contractors. This program consists of two smaller programs – the Prior Approval Program and the Preferred Surety Bond Program.

The former program guarantees 90% of all losses on contracts up to $100,000, if such should occur, and on contracts awarded to historically disadvantages small businesses, referenced above. It also offers an 80% guarantee on individual contracts up to $6.5 million in value or even up to $10 million in certain specific cases.

The latter, the Preferred Program, covers up to 70% of losses. It enables certain certified partner sureties to issue, monitor, and service bonds without the prior approval of the SBA, as is the case in the Prior Approval Program.

Together, these two programs allow small business contractors to get access to a bigger variety of federal construction contracts. They assume a big portion of the financial responsibility and thus clear the way for those contractors who are otherwise well-equipped to work on a contract.

In addition to those two SBA bonding programs, more and more states are introducing local bonding support programs for new and emerging contractors. Bonding support programs offer a variety of services that include technical assistance, mentoring, and assistance with loans. The bond guarantee programs are the local equivalent of the Small Business Administration SBG Program.

Although more states have yet to institute these local programs, a number of examples already exist, such as the bond guarantee programs in New York, California, Illinois and Ohio. Other states are working on introducing regulations that will institute such programs. Pennsylvania House Bill 41 is one such example –though it still has to pass the scrutiny of a number of parties before its introduction.

While this article covers a limited number of regulatory methods for supporting small construction contractors, there are further mechanisms available both on the state and federal level. Initiatives like the Small Business Development Centers provide local assistance, low-cost training, and business consulting to help small businesses remain competitive in the marketplace and ensure that they get a fair share of business.

Even though more may be done to support small construction contractors, the current administration has taken small business’s fate to heart.

Todd Bryant

Todd Bryant is the president and founder of Bryant Surety Bonds. He is a surety bonds expert with years of experience in helping contractors get bonded and start their business.

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