[Federal Register Volume 59, Number 104 (Wednesday, June 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-13239]


[[Page Unknown]]

[Federal Register: June 1, 1994]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

 

Small Business Size Standards; Surety Bond Guaranty Assistance 
Program

AGENCY: Small Business Administration.

ACTION: Final rule.

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SUMMARY: The Small Business Administration (SBA) is adopting as final a 
size standard for the Surety Bond Guaranty Program of $5.0 million in 
average annual receipts for firms in the construction and services 
industries. This size standard is being adopted in order to take into 
consideration the effect of inflation since 1978 on the current size 
standard and to expand eligibility for SBA surety guarantees to firms 
in the construction and services industries above $3.5 million that are 
experiencing difficulties in obtaining surety bonding in the private 
market.

DATES: Effective July 1, 1994.

FOR FURTHER INFORMATION CONTACT:
Gary M. Jackson, Director, Size Standards Staff, Tel: (202) 205-6618.

SUPPLEMENTARY INFORMATION: The SBA has administered a program of 
contract surety bond guarantee assistance for small businesses since 
1971. The SBA guarantee enables participating surety companies to 
furnish surety bonds on behalf of small contractors that would be 
unable to obtain bonding on reasonable terms and conditions without an 
SBA guarantee. The SBA guarantees the surety company against a 
percentage of loss it may incur under an eligible contractor's bond.

    This final rule will increase the surety bond guarantee size 
standard to $5.0 million in average annual receipts from $3.5 million 
for firms in the construction and services industries which apply for 
such guarantees. This adopted size standard is lower than the $6 
million size standard the SBA had proposed on August 27, 1993 (58 FR 
45300). As stated in the proposed rule, the SBA believes the current 
$3.5 million size standard, established in 1978 (43 FR 21689), should 
be increased for three reasons: (1) to account for the effects of 
inflation since 1978, (2) to bring the surety size standard closer to 
the size standards established for other program purposes for the 
construction industries ($7 million for special trades and $17 million 
for general and heavy construction), and (3) to extend assistance to 
firms above $3.5 million who otherwise could not obtain surety bonds on 
reasonable terms and conditions. Further consideration of the proposed 
size standard by the SBA in light of comments received to the proposed 
size standard has led to the conclusion that a size standard of $5 
million is more appropriate for purposes of the surety bond guaranty 
program.
    The SBA received a total of thirty-eight comments in response to 
the August 27, 1993 proposed rule. The comments received show 
approximately half in favor and half opposed to the proposed increase 
to $6.0 million. Twenty of the thirty-eight comments supported the 
proposed rule. The affirming comments, fourteen from surety companies 
and surety associations and six from contractors and contractor 
associations, agreed that inflation over the past 15 years has reduced 
the availability of surety bonds for small contractors by not being 
eligible for an SBA guaranteed surety bond due to their business size. 
These commenters agreed that the Surety Bond Guaranty size standard 
should be revised to $6.0 million based on inflation.
    The SBA received eighteen comments opposing the proposed increase 
to $6.0 million in annual receipts. All eighteen comments were from 
surety companies and surety associations (SBA's partners in the surety 
bonding process). These comments disagreed with the need for the 
proposed rule and expressed concern about its impact on the Surety 
Guaranty Program.
    All eighteen of the respondents commenting negatively on the 
proposed Surety Bond Guaranty size standard disagreed with the Agency 
position that $6 million in revenues should define a small business in 
the construction and service industries, and contended that the size 
standard should remain at the current level of $3.5 million. The 
commenters argued that, based on a recent study by the National 
Association of Surety Bond Producers, surety bonds are readily 
available for small firms with less than $2.0 million in revenues. The 
commenters emphasized that if the purpose of the SBA surety bond 
program is to assist small businesses in obtaining bonds, the current 
market availability of surety bonds is such that assistance is not 
necessary. Therefore, they claimed that the SBA need not increase the 
size standard. Furthermore, several of the comments indicated that 97.4 
percent of all construction enterprises meet the existing $3.5 million 
size standard. These commenters felt that the proposed rule would make 
the Surety Bond Guaranty size standard so large that it would include 
large businesses and, therefore, diminish the benefit to small 
businesses. According to these commenters, this action would defeat the 
original purpose of support for small contractors.
    The SBA is aware that many firms with revenues between $3.5 million 
and $6 million have no difficulty obtaining bonds. Nonetheless, there 
exists a segment of firms over $3.5 million in revenues that are not 
able to obtain a surety bond on reasonable terms and conditions without 
an SBA guarantee. These firms are denied bonding because they are 
viewed by a private surety as presenting too great a risk. These firms 
may lack a track record because of their infrequency of seeking bonding 
or they may have been in business for a relatively short period of 
time. However, with an SBA guarantee, the risk is reduced to a level 
where the surety will issue a bond. The SBA believes the Surety Bond 
Guaranty Program should also be available to these firms so long as 
they meet other program and bonding criteria. It should be emphasized 
that many of these firms were at one time small businesses eligible for 
a surety bond guaranty, but inflation over the years has effectively 
increased their nominal size to a level exceeding the current size 
standard without a corresponding growth in real terms relative to other 
businesses.
    The SBA agrees that the vast majority of construction firms are 
already included under the existing size standard. The SBA estimates 
that approximately 95 percent of existing companies fall within the 
existing standard. However, the more significant statistic is that 
these construction firms account for only about 40 percent of the total 
construction receipts. An increase in the size standard will continue 
to define as a small business, firms whose total combined receipts 
represent less than half of total construction receipts.
    After considering the arguments presented by the public comments 
received opposing an increase in the current size standard, the SBA 
continues to believe that an increase in the Surety Bond Guaranty size 
standard is appropriate. It is being increased, however, to $5 million 
in annual receipts rather than the proposed $6 million size standard. 
The SBA is now persuaded, based on the negative comments to the 
proposal, that $5 million is a more appropriate size standard than $6 
million for purposes of this surety bond guaranty program.
    As a lower but needed increase to the surety guarantee size 
standard, the level of $5 million is being adopted. The SBA believes an 
increase in the size standard to $5 million is appropriate for several 
reasons. First, this increase makes the surety guarantee bond size 
standard consistent with increases recently adopted by the SBA for 
other program purposes in industries having a $3.5 million size 
standard (59 FR 16513). Under that action, size standards were adjusted 
for inflation occurring between the third quarter of 1982 through the 
fourth quarter of 1993. At the time of the last general inflationary 
adjustment effective in 1984, SBA made no adjustment to the surety bond 
guaranty program size standard of $3.5 million, even though that 
standard was established in 1978. The SBA believed at that time that 
the existing surety size standard continued to be appropriate for the 
Surety Bond Guaranty Program, but the effect of another ten years of 
inflation has now significantly eroded the base of firms eligible for 
the program. Although the $5 million size standard does not represent a 
full inflationary adjustment since 1978, it does take into account most 
of the effects of inflation, while still retaining a size standard at 
an acceptable level. Second, the $5.0 million level is, with few 
exceptions, the lowest size standard established by the SBA for 
nonmanufacturing industries, including the services industries to which 
the surety guarantee size standard also applies. Third, two major 
associations representing a large number of contractors and specialty 
sureties recommended an alternative size standard of $5 million to 
account for inflation and to meet the surety bonding needs of small 
``hard to place,'' minority and emerging contractors. The SBA believes 
the $5 million size standard is needed to assist such firms toward 
participation in the standard surety market by enabling them to remain 
eligible for SBA surety guarantees for an additional period of business 
growth, which can be critical to a firm's economic strength.
    SBA considered carefully the nature and extent of the opposition to 
an increase to $6 million contained in the comments, and has concluded 
that its objectives in adjusting for inflation, achieving consistency 
with its overall system of size standards, and improving availability 
of program benefits for particularly vulnerable firms can be adequately 
met by raising the standard to only $5 million. Additionally, SBA now 
believes that a $6 million standard for this program would have 
unacceptable adverse consequences in terms of diminishing a market that 
a significant portion of the surety industry relies upon, and in terms 
of the willingness of all sureties to utilize the SBA guaranty rather 
than simply denying a bond to a contractor.
    Some negative comments received on the proposed size standard 
pointed out that expanding the size standard would provide additional 
demand on the program. Some expressed fear that as larger companies 
participate in the program, the agency's limited resources would 
ultimately be unavailable to those small contractors that most need the 
assistance. This concern is underscored by the view that construction 
firms with receipts over $3.5 million have ample access to standard 
surety markets.
    The SBA analysis of the Surety Bond Guaranty Program does indicate 
that the revised size standards will increase the demand on the 
Program. The SBA estimates that this additional demand could be as much 
as $200 million. However, a review of the program usage for the last 
three years indicates that the Program has been operating well below 
its appropriated limit. Therefore, the SBA concluded that the increased 
demand based on a $5.0 million Surety Bond Guaranty size standard could 
be accommodated with the existing funding levels appropriated by the 
Congress.
    A final issue raised by several negative commenters expressed the 
concern that increasing the size standard would, of necessity, increase 
the government's potential for loss. These comments pointed out that 
contractors with receipts of $3.5 million to $6.0 million tend to 
perform larger jobs requiring more sophisticated levels of management 
control. These larger companies sometimes experience declines in 
bonding credit where management talents are not proven. The insurers 
point out that increasing the size standard would demand more oversight 
on the part of the SBA to ensure that larger contractors have the 
management expertise to perform these large contracts. They argue that 
in the absence of this additional oversight, the potential for 
government loss would be unduly increased.
    The SBA recognizes that there is a valid concern when the potential 
for greater loss to the government is increased. The SBA notes that 
currently most of the contractors requiring assistance in obtaining 
surety bonds have annual receipts of less than $2 million, and that the 
average surety bond is a little greater than $100,000. The Agency 
believes that the increase in the Surety Bond Guaranty size standard 
would not demand more oversight on the part of the SBA to ensure that 
larger contractors have the management expertise to perform. Because 
SBA is the guarantor to the participating sureties, SBA expects 
participating sureties to adhere to the SBA and industry general 
principles and practices used in evaluating credit, capacity, and the 
surety business. Prudent underwriting performed by the surety prior to 
obtaining SBA guarantee provides a reasonable expectation that the 
principal will perform according to the covenants and conditions of the 
contract. In addition, the terms and conditions of the surety bond are 
reasonable in light of the shared risks involved and the extent of the 
surety/SBA participation and monitoring of contract performance.
    The SBA believes that the $5 million size standard will accomplish 
the purposes stated in the proposed rule for increasing the size 
standard. Those reasons were to take into consideration, as 
appropriate, inflation on the eligibility of firms for the Surety Bond 
Guaranty Program, to bring the Surety Bond Guaranty size standards 
closer to the size standards used in the construction industries for 
SBA's procurement and loan programs, and to extend assistance to 
contracting firms above $3.5 million in size who otherwise could not 
obtain surety bonds on reasonable terms and conditions without an SBA 
guarantee.

Compliance With Regulatory Flexibility Act, Executive Orders 12612, 
12778, and 12866, and the Paperwork Reduction Act

General

    SBA considers that this final rule will impact, in terms of 
eligibility, on a substantial number of small entities for purposes of 
the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), and will have a 
significant economic impact on a substantial number of small entities 
for purposes of this Act. Eligible contractors remit to the SBA a 
guarantee fee of $6 per $1,000 of the awarded contract price. The 
amount estimated below in (1) would represent an impact upon newly 
eligible contractors of approximately $1.1 million, at the estimated 
participation level. However, since the contemplated economic impact in 
terms of the amount of SBA guarantee utilization is approximately $200 
million [see (1), below], it constitutes a significant rule for the 
purpose of E.O. 12866. Immediately below, the SBA has set forth a 
summary regulatory impact analysis and a final regulatory flexibility 
analysis of this rule.
(1) Description of Entities to Which the Rule Applies
    SBA estimates that 11,500 additional firms (or an additional 2.2 
percent), out of a total of 529,000 firms in the construction 
industries, will gain small business status for the Surety Bond 
Guarantee Program by adopting this final rule. There were approximately 
11,500 firms in the construction industries with between $3.5 and $5.0 
million in annual sales according to a special tabulation prepared by 
the Census Bureau for the SBA using 1990 data. These 11,500 firms 
accounted for approximately $44 billion in sales (8.5 percent of total 
construction receipts). With the adoption of this rule, they become 
eligible for SBA's surety bond assistance, provided they meet the other 
program requirements.
    While an estimated 11,500 firms will be newly eligible as a result 
of this rule, the number of additional firms actually receiving 
assistance will be much fewer. The SBA estimates that 104 additional 
firms will receive assistance in an average year. This estimate is 
based on the fact that less than one percent (4,532 in FY 1991) of the 
503,000 construction firms that are currently eligible now receive SBA 
guaranteed surety bonds, and it also assumes that a similar percentage 
of the newly eligible firms in the $3.5 million to $5.0 million size 
range would receive SBA guaranteed surety bonds.
    SBA estimates of $200 million in additional guarantees will occur 
based on its experience with those firms that in the past have received 
SBA guaranteed bonds. SBA has observed that these users have obtained 
SBA guarantees on contract bonds representing approximately 61 percent 
of their gross revenue. Construction firms in the $3.5 to $5.0 million 
sales range generate nearly $44 billion in annual sales, or an average 
of $3.85 million per firm ($44 billion11,500 firms). One 
hundred and four of those newly eligible construction firms (less than 
1 percent) are projected to utilize the SBA Surety Bond Guarantee 
Program. These firms collectively generate $400 million in sales. 
However, since approximately 61 percent of participating firms' sales 
are guaranteed under SBA's Surety Bond Program, roughly $244 million in 
additional SBA guaranteed contract surety bonding will be covered, or 
about $200 million in additional government commitments (see Table, 
below).

                                                                                                                
     Construction firms in $3.5-$50 million range                                                               
--------------------------------------------------------                      Total value of                    
                    Total to receive                     Total receipts of   bonding affected   Total government
                       SBA surety      Average receipts   firms receiving    by the guarantee    exposure (e) x 
      Total         guarantees (a) x      per firm        bonds (b) x (c)       (d) x 61%             82%       
                         0.91%                                                                                  
(a)                (b)..............  (c)..............  (d)..............  (e)..............  (f)              
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11,477...........  104 firms........  $3.85 million....  $400.4 million...  $244.2 million...  $200.3 million.  

    The adopted standard, however, does not impose a regulatory burden 
on these newly eligible firms because it does not regulate or control 
behavior.
(2) Description of Potential Benefits of the Rule
    The benefit of this rule for the government is that the resulting 
additional competition from contracting firms that are newly eligible 
to bid on and perform contracts under the adopted size standard should 
result in lower costs to the Federal government and to other public and 
private contracting bodies for construction and service contracts. 
Since 1971, through and including fiscal year 1992, it is estimated 
that the Surety Bond Guarantee Program has saved the public sector over 
$1.2 billion. The savings is the computation between the lowest bid 
coming from the Surety Bond Guaranty Program participant and the next 
higher bidder. The premise is that the cost of the procurement has been 
reduced because the small contractor (i.e., the lowest bidder), would 
not have been awarded the job had the contractor not been a participant 
in the Surety Bond Guarantee Program. The savings to the public sector 
at the local, city, state and federal levels will also include amounts 
these entities would have had to pay for the higher bidder's surety 
bond protection if the Surety Bond Guarantee Program were not in 
existence. Private sector savings are also believed to be significant, 
but not measurable. In addition, the firms that will now be considered 
small for purposes of surety bond assistance will benefit through the 
receipt of such assistance in further developing their business 
objectives.
(3) Description of Potential Costs of the Rule
    This change in size standards as it impacts on government should 
not add a major element of cost to the government and, in fact, as 
described above in (2), may reduce the cost to a procuring Federal or 
other public agency as a result of additional competition for 
contracts. The competitive effects of size standards revisions differ 
from those normally associated with regulations affecting key economic 
factors such as the price of goods and services, costs, profits, 
growth, innovation, mergers and foreign trade. The change to size 
standards is not anticipated to have any appreciable effect on any of 
these factors.
(4) Description of the Potential Net Benefits from the Rule
    From the above discussion, SBA believes that, because the potential 
costs of this rule are minimal, the potential net benefits are clear. 
By increasing the size standard to $5.0 million, a number of businesses 
in the $3.5 to $5.0 million range that presently have difficulty 
obtaining surety bonding will now be eligible for SBA surety bond 
guarantee assistance. As a result, competition will be similarly 
increased, and hence reduce the overall costs to both public and 
private procuring bodies.
(5) Description of Reasons Why This Action is Being Taken and 
Objectives of Rule
    SBA has provided above in the supplementary information a 
description of the reasons why this action is being taken and a 
statement of the reasons for and objectives of this rule.
(6) Legal Basis for the Rule
    The legal basis for the rule is Sections 3(a), 5(b)(6), and 15(i) 
of the Small Business Act, 15 U.S.C. 632(a), 634(b)(6), 637(a) and 
644(c).
(7) Federal Rules
    There are no Federal rules that duplicate, overlap or conflict with 
this rule. SBA has statutorily been given exclusive jurisdiction in 
establishing size standards.
(8) Significant Alternatives to Rule
    The changes to the current size standard set forth in this rule 
attempt to establish the most appropriate definition of small 
businesses eligible for SBA's Surety Bond Guarantee Program. The SBA 
considered a $6.0 million Surety Bond Guaranty size standard as well as 
a $5.0 million Surety Bond Guaranty size standard, but decided that 
$5.0 million was the best alternative for the reasons set forth in the 
supplementary information.
    SBA certifies that the rule will not have federalism implications 
warranting the preparation of a Federalism Assessment in accordance 
with Executive Order 12612.
    The SBA further certifies that this rule will not add any new 
reporting or recordkeeping requirements under the Paperwork Reduction 
Act of 1980, 44 U.S.C., Chapter 35.
    For purposes of Executive Order 12778, SBA certifies that this rule 
is drafted, to the extent practicable, in accordance with the standards 
set forth in section 2 of that order.

List of Subjects in 13 CFR Part 121

    Government procurement, Government property, Grant programs--
business, Loan programs--business, Small Business.

    Accordingly, part 121 of 13 CFR is amended as follows:

PART 121--[AMENDED]

    1. The authority citation for part 121 continues to read as 
follows:

    Authority: 15 U.S.C. 632(a), 634(b)(6), 637(a) and 644(c).

    2. Section 121.802, is amended by revising paragraph (a)(3) to read 
as follows:


Sec. 121.802  Establishment of the size standard.

    (a) * * *
    (3) For purposes of surety bond guarantee assistance,
    (i) Any construction (general or special trade) concern is small if 
its annual receipts average for its preceding three completed fiscal 
years does not exceed $5.0 million.
    (ii) Any concern performing a contract for services (including, but 
not limited to services set forth in Division I, Services, of the 
Standard Industrial Classification Manual) is small if its annual 
receipts average for its preceding three completed fiscal years does 
not exceed $5.0 million.
    (iii) For other surety bond guarantee assistance, an applicant must 
meet the size standard set forth in Sec. 121.601 for the primary 
industry (as defined in Sec. 121.802(b)) in which the applicant, 
including its affiliates, is engaged.
* * * * *
    Dated: May 5, 1994.
Erskine B. Bowles,
Administrator.
[FR Doc. 94-13239 Filed 5-31-94; 8:45 am]
BILLING CODE 8025-01-M