[Federal Register Volume 79, Number 8 (Monday, January 13, 2014)]
[Rules and Regulations]
[Pages 2084-2087]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-00295]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 115

RIN 3245-AG56


Surety Bond Guarantee Program

AGENCY: U.S. Small Business Administration.

ACTION: Final rule.

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SUMMARY: The Small Business Administration (SBA) is issuing this final 
rule to conform the regulations governing the Surety Bond Guarantee 
Program to certain provisions of the National Defense Authorization Act 
for Fiscal Year 2013 (NDAA), including the provisions that increase the 
contract amounts for which SBA is authorized to guarantee bonds, grant 
SBA the authority to partially deny liability under its bond guarantee, 
and prohibit SBA from denying liability based on material information 
that was provided as part of the guarantee application in the Prior 
Approval Program. This rule also makes changes to the Quick Bond 
Guarantee Application and Agreement, the timeframes for taking certain 
actions related to claims, and the dollar threshold for determining 
when a change in the Contract or bond amounts meets certain criteria or 
requires certain action. Finally, the final rule eliminates references 
to the provisions of the American Recovery and Reinvestment Act of 2009 
(Recovery Act) that have expired.

DATES: This rule is effective February 12, 2014.

FOR FURTHER INFORMATION CONTACT: Barbara J. Brannan, Office of Surety 
Guarantees, 202-205-6545, email: [email protected].

SUPPLEMENTARY INFORMATION:

I. Background Information

    The U.S. Small Business Administration (SBA) guarantees bid, 
payment and performance bonds for small and emerging contractors who 
cannot obtain surety bonds through regular commercial channels. SBA's 
guarantee gives Sureties an incentive to provide bonding for small 
businesses and thereby assists small businesses in obtaining greater 
access to contracting opportunities. SBA's guarantee is an agreement 
between a Surety and SBA that SBA will assume a certain percentage of 
the Surety's loss should a contractor default on the underlying 
contract.
    On August 1, 2013, SBA published a notice of proposed rulemaking 
with a request for comments in the Federal Register. The rule proposed 
to: (1) Conform SBA's Surety Bond Guarantee Program (``SBG Program'') 
to certain provisions of the National Defense Authorization Act of 2013 
(NDAA); (2) clarify the extent to which a Principal may subcontract 
work performed under the Contract; (3) make changes to the Quick Bond 
Guarantee Application and Agreement; (4) increase the dollar threshold 
for determining when a change in the Contract or bond amounts may 
result in denial of liability or require certain actions; (5) reduce 
the timeframes for taking certain actions related to claims; and (6) 
eliminate references to the provisions of the American Recovery and 
Reinvestment Act of 2009 (Recovery Act) that have expired. See 78 FR 
46528.
    The comment period was open until September 30, 2013. SBA received 
two comments, both from trade associations, that expressed their 
support for the proposed rule and indicated that the changes are 
favorable to small businesses. With respect to the proposed increases 
in the dollar thresholds, one commenter noted that a Surety may not be 
in a position to notify SBA or seek SBA's approval when a change order 
exceeds the specified dollar threshold because a Surety may be required 
contractually to waive notice of contract amount changes. Under section 
115.32(d), a Prior Approval Surety is required to notify SBA of any 
required changes in the Contract or bond amount that aggregate 25% or 
$50,000 (to be increased to $100,000 under this final rule) ``as soon 
as the Surety acquires knowledge of the change''. Thus, the Surety is 
required to provide notice to SBA under this provision upon acquiring 
knowledge of

[[Page 2085]]

these aggregated changes. It is important to note that, under section 
115.15(b), the Surety is required to monitor the Principal's progress 
on bonded Contracts guaranteed by SBA and, accordingly, SBA would 
expect the Surety to be aware of changes in the Contract or bond 
amounts. Moreover, for increases in the original bond amount as a 
result of a single change order of at least 25% or $50,000 (to be 
increased to $100,000 by this final rule), the Surety must, under 
section 115.32(d), obtain SBA's prior written approval of such increase 
(and such approval is conditioned upon payment by the Surety of the 
increase in the Principal's guarantee fee).
    In addition, as the commenter observed, SBA now has the discretion, 
under section 115.19, to deny liability in whole or in part. The 
commenter suggested that SBA propose regulations to address the use of 
such discretion where the Surety does not obtain approval or notify SBA 
of the change in the Contract or bond amount. However, the exercise of 
this discretion must be based on the circumstances of each case and 
will be determined on a case-by-case basis.
    SBA is adopting the rule as proposed and as described in the 
section-by-section analysis below.

II. Section By Section Analysis

    Section 115.10. SBA is revising the definition of ``Applicable 
Statutory Limit'' to include the maximum amounts of any Contract or 
Order for which SBA is authorized by the NDAA to guarantee, or commit 
to guarantee, a Bid Bond, Payment Bond, Performance Bond, or Ancillary 
Bond. The statutory limits set by the NDAA are (1) $6.5 million (as 
adjusted for inflation in accordance with 41 U.S.C. 1908); and (2) $10 
million if a contracting officer of a Federal agency certifies that 
such guarantee is necessary. In addition, SBA is including a reference 
in the definition to the maximum amounts of any Contract or Order when 
SBA guarantees the bond in connection with a procurement related to a 
major disaster pursuant to section 12079 of Public Law 110-246. Under 
this provision, which was enacted on June 18, 2008, the maximum amounts 
are: (1) $5 million; and (2) $10 million on Federal Contracts or Orders 
at the request of the Head of any Federal agency involved in 
reconstruction efforts in response to a major disaster. The authority 
to guarantee bonds under this provision is subject to the availability 
of funds appropriated in advance specifically for the purpose of 
guaranteeing bonds for any Contract or Order related to a major 
disaster. SBA does not expect this authority to be often used, given 
NDAA's increase in the maximum amounts for any Contract or Order up to 
$6.5 million (and $10 million if a Federal contracting officer 
certifies that such guarantee is necessary) and the requirement that 
funds be appropriated in advance specifically for guaranteeing bonds 
related to a major disaster. No changes have been made to this 
provision as proposed.
    Section 115.12(b). SBA is deleting the reference to the ``Contract 
Bonds'' section of the current ``Manual of Rules, Procedures and 
Classifications of the Surety Association of America'' and is replacing 
this reference with two specific types of bonds, Commercial and 
Fidelity bonds, which are not eligible for an SBA guarantee. No changes 
have been made to this provision as proposed.
    Section 115.12(e)(3). This provision is being deleted in its 
entirety, as it relates to requirements imposed by the Recovery Act 
that expired on September 30, 2010. No changes have been made to this 
provision as proposed.
    Section 115.12(e)(4). This provision is being renumbered as (e)(3), 
and now reflects the authority to guarantee bonds on Federal Contracts 
or Orders greater than $6.5 million, but not exceeding $10 million, 
upon a signed certification of a Federal contracting officer, as 
authorized by the NDAA. No changes have been made to this provision as 
proposed.
    Section 115.12(e)(5). This provision has been renumbered as (e)(4), 
and implements an alternative statutory authority provided SBA under 
Public Law 110-246 for guaranteeing bonds for procurements related to a 
major disaster. References to requirements imposed by the Recovery Act 
that expired on September 30, 2010, have been deleted. No changes have 
been made to this provision as proposed.
    Section 115.13(a)(5). SBA is revising this provision to clarify 
that, to be eligible for a bond guaranteed by SBA, the Principal must 
retain full responsibility for the oversight and management of the 
Contract, including any work performed by any subcontractor, and may 
not subcontract the full scope of the statement of work. No changes 
have been made to this provision as proposed.
    Section 115.17(b)(2). SBA is reducing the time frame allowed for a 
Surety to reimburse or credit SBA for salvage and recovery from 90 days 
to 45 days after the Surety receives any salvage and recovery. No 
changes have been made to this provision as proposed.
    Section 115.19. SBA is revising the introductory paragraph of this 
provision to conform it to current law by deleting the time frame 
reference required by the Recovery Act, which has expired, and by 
inserting the relevant requirements of the NDAA, including the 
authority of SBA to deny liability, in whole or in part, within its 
discretion if any of the circumstances in paragraphs (a) through (h) of 
this section exist, and the prohibition on denying liability based on 
material information that was provided to SBA as part of the Surety's 
guarantee application in the Prior Approval Program. SBA made one minor 
clarification to the provision as proposed by revising the introductory 
language in section 115.19 to make it clear that the material 
information must have been provided to SBA in the Surety's application. 
SBA is also amending section 115.19(c)(1) by increasing the dollar 
threshold for determining whether the Surety has committed a material 
breach of one or more terms or conditions of its Prior Approval or PSB 
Agreement from $50,000 to $100,000. In addition, SBA is amending 
section 115.19(d) by increasing the dollar threshold for determining 
whether the Surety has committed a substantial violation of SBA 
regulations from $50,000 to $100,000, and is amending section 
115.19(e)(2) by increasing the dollar threshold for determining whether 
a Prior Approval Surety has agreed to or acquiesced in any material 
alteration in the terms, conditions, or provisions of the bond from 
$50,000 to $100,000. In each of these sections, the phrase ``whichever 
is less'' is being added after the $100,000 to clarify the meaning of 
this requirement. No other changes have been made to this provision as 
proposed.
    Section 115.30(d)(2). SBA is deleting the phrase ``or the warranty/
maintenance period'' from this provision to allow the Quick Bond 
Application and Agreement (SBA Form 990A) to be used for a Contract 
that includes a maintenance period of 2 years or less (for defective 
workmanship or materials only), and with SBA's approval, for longer 
maintenance periods and broader coverage, as provided in section 115.10 
under the definition of ``Contract''. In addition, SBA is increasing 
the allowable liquidated damages provision from $250.00 per day to 
$1,000.00 per day. No changes have been made to this provision as 
proposed.
    Section 115.31(d). SBA is revising the final sentence of this 
provision by basing the example on the current statutory limit of $6.5 
million. No

[[Page 2086]]

changes have been made to this provision as proposed.
    Section 115.32(d). SBA is amending this provision by changing the 
dollar threshold for determining when the Prior Approval Surety must 
notify SBA of the change and/or obtain SBA's approval from at least 
$50,000 to $100,000. The phrase ``whichever is less'' has been added to 
clarify the meaning of this requirement. No changes have been made to 
this provision as proposed.
    Section 115.35(c)(1). SBA is reducing the time frame allowed for a 
Prior Approval Surety to submit a claim to SBA from one year to 90 days 
after the Surety pays the claim. In addition, the title of the SBA Form 
994H, ``Default Report, Claim for Reimbursement and Record of 
Administrative Action,'' has been changed to ``Default Report, Claim 
for Reimbursement and Report of Recoveries,'' to reflect the current 
version of the form. No changes have been made to this provision as 
proposed.
    Section 115.35(c)(4). SBA is reducing the time frame for SBA to pay 
a claim submitted by a Surety in the Prior Approval Program from 90 
days to 45 days after receipt of the requisite information. No changes 
have been made to this provision as proposed.
    Section 115.36(a)(3). SBA is reducing the time frame allowed for a 
Surety to reimburse SBA its share of a settlement from 90 days to 45 
days after receipt. No changes have been made to this provision as 
proposed.
    Section 115.67(a). SBA is increasing the dollar threshold for 
determining when a PSB Surety must present checks for additional fees 
due from the Principal and Surety from $50,000 to $100,000. The phrase 
``whichever is less'' has been added to clarify the meaning of this 
requirement. No changes have been made to this provision as proposed.
    Section 115.69. For imminent breach payments that exceed 10% of the 
Contract amount, SBA is revising this provision to give the PSB Surety 
the opportunity to request SBA to approve the amount prior to the 
Surety making the Imminent Breach payment. SBA will approve such 
payment if SBA finds that the payment is necessary and reasonable. If 
the Surety does not request prior SBA approval for such payments, SBA 
may refuse to reimburse the Surety if SBA finds that the payment that 
exceeds 10% of the Contract amount was not necessary and reasonable. No 
changes have been made to this provision as proposed.
    SBA 115.70(a). SBA is reducing the time frame allowed for a PSB 
Surety to submit a claim to SBA from one year to 90 days after the 
Surety pays the claim. SBA is also reducing the time frame for SBA to 
pay a claim submitted by a Surety in the PSB Program from 90 days to 45 
days after receipt of the requisite information. No changes have been 
made to this provision as proposed.

Compliance With Executive Orders 12866, 12988, and 13132, the Paperwork 
Reduction Act (44 U.S.C. Ch. 35) and the Regulatory Flexibility Act (5 
U.S.C. 601-612)

Executive Order 12866
    The Office of Management and Budget (OMB) has determined that this 
final rule does not constitute a significant regulatory action under 
Executive Order 12866. This is also not a ``major rule'' under the 
Congressional Review Act, 5 U.S.C. 800.
Executive Order 12988
    This action meets applicable standards set forth in Sections 3(a) 
and 3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize 
litigation, eliminate ambiguity, and reduce burden. The action does not 
have retroactive or preemptive effect.
Executive Order 13132
    SBA has determined that this final rule will not have substantial, 
direct effects on the States, on the relationship between the national 
government and the States, or on the distribution of power and 
responsibilities among the various levels of government. Therefore, for 
the purposes of Executive Order 13132, SBA has determined that this 
final rule has no federalism implications warranting preparation of a 
federalism assessment.
Paperwork Reduction Act, 44 U.S.C. Ch. 35
    SBA has determined that this final rule does not impose additional 
reporting or recordkeeping requirements under the Paperwork Reduction 
Act, 44 U.S.C., Chapter 35.
Regulatory Flexibility Act, 5 U.S.C. 601-612
    The Regulatory Flexibility Act (RFA) requires administrative 
agencies to consider the effect of their actions on small entities, 
small non-profit enterprises, and small local governments. Pursuant to 
the RFA, when an agency issues a rulemaking, the agency must prepare a 
regulatory flexibility analysis which describes the impact of the rule 
on small entities. However, section 605 of the RFA allows an agency to 
certify a rule, in lieu of preparing an analysis, if the rulemaking is 
not expected to have a significant economic impact on a substantial 
number of small entities. There are twenty-one Sureties that 
participate in the SBA program, and no part of this final rule would 
impose any additional cost or any significant burden on them. 
Consequently, this final rule does not meet the substantial number of 
small businesses criterion anticipated by the Regulatory Flexibility 
Act.

List of Subjects in 13 CFR Part 115

    Claims, Reporting and recordkeeping requirements, Small businesses, 
Surety bonds.

    For the reasons stated in the preamble, SBA amends 13 CFR part 115 
as follows:

PART 115--SURETY BOND GUARANTEE

0
1. The authority citation for part 115 is revised to read as follows:

    Authority: 5 U.S.C. app 3; 15 U.S.C. 687b, 687c, 694a, 694b 
note; and Pub. L. 110-246, Sec. 12079, 122 Stat. 1651.


0
2. In Sec.  115.10, revise the definition of ``Applicable Statutory 
Limit'' to read as follows:


Sec.  115.10  Definitions.

* * * * *
    Applicable Statutory Limit means the maximum amount, set forth 
below, of any Contract or Order for which SBA is authorized to 
guarantee, or commit to guarantee, a Bid Bond, Payment Bond, 
Performance Bond, or Ancillary Bond:
    (1) $6.5 million (as adjusted for inflation in accordance with 41 
U.S.C. 1908);
    (2) $10 million if a contracting officer of a Federal agency 
certifies, in accordance with section 115.12(e)(3), that such guarantee 
is necessary; or
    (3) if SBA is guaranteeing the bond in connection with a 
procurement related to a major disaster pursuant to section 12079 of 
Pub. L. 110-246, see section 115.12(e)(4).
* * * * *

0
3. Amend Sec.  115.12 as follows:
0
a. Revise paragraph (b);
0
b. Remove paragraph (e)(3);
0
c. Redesignate paragraphs (e)(4) and (5) as paragraphs (e)(3) and (4), 
respectively;
0
d. In newly redesignated paragraph (e)(3), revise the heading and the 
first sentence;
0
e. Revise newly redesignated paragraph (e)(4) introductory text, remove 
newly redesignated paragraph (e)(4)(iii), and redesignate paragraph 
(e)(4)(iv) as paragraph (e)(4)(iii);

[[Page 2087]]

0
f. In newly redesignated paragraph (e)(4)(iii), remove ``paragraph 
(e)(5)'' and add in its place ``paragraph (e)(4)''.
    The revisions read as follows:


Sec.  115.12  General program policies and provisions.

* * * * *
    (b) Eligibility of bonds. Bid Bonds and Final Bonds are eligible 
for an SBA guarantee if they are executed in connection with an 
eligible Contract, as defined in Sec.  115.10, Definitions. Commercial 
and Fidelity bonds are not eligible for SBA guarantees. Ancillary Bonds 
may also be eligible for SBA's guarantee. A performance bond must not 
prohibit a Surety from performing the Contract upon default of the 
Principal.
* * * * *
    (e) * * *
    (3) Federal Contracts or Orders in excess of $6,500,000 (as 
adjusted for inflation in accordance with section 1908 of title 41, 
United States Code). SBA is authorized to guarantee bonds on Federal 
Contracts or Orders greater than $6,500,000 (as adjusted for inflation 
in accordance with 41 U.S.C. 1908), but not exceeding $10,000,000, upon 
a signed certification of a Federal contracting officer. * * *
    (4) Alternative authority to guarantee bonds for Contracts and 
Orders related to a major disaster area. Subject to the availability of 
funds appropriated in advance specifically for the purpose of 
guaranteeing bonds for any Contract or Order related to a major 
disaster, SBA may, as an alternative to the authority otherwise set 
forth in this Part, guarantee bonds on any Contract or Order under the 
following terms and conditions:
* * * * *

0
4. In Sec.  115.13, amend paragraph (a)(5) by revising the second 
sentence and adding a third sentence to read as follows:


Sec.  115.13  Eligibility of Principal.

    (a) * * *
    (5) * * * SBA will not guarantee bonds for Principals who are 
primarily brokers. In addition, the Principal must retain full 
responsibility for the oversight and management of the Contract, 
including any work performed by any subcontractor, and may not 
subcontract the full scope of the statement of work.
* * * * *


Sec.  115.17  [Amended]

0
5. In Sec.  115.17, amend paragraph (b)(2) by removing ``90 days'' and 
adding ``45 days'' in its place.
0
6. Amend Sec.  115.19 by revising the introductory text and by removing 
``$50,000'' wherever it appears in paragraphs (c)(1), (d), and (e)(2) 
and adding in its place ``$100,000, whichever is less''.
    The revision reads as follows:


Sec.  115.19  Denial of liability.

    In addition to equitable and legal defenses and remedies under 
contract law, the Act, and the regulations in this Part, SBA is 
relieved of liability in whole or in part within its discretion if any 
of the circumstances in paragraphs (a) through (h) of this section 
exist, except that SBA shall not deny liability on Prior Approval bonds 
based solely upon material information that was provided to SBA as part 
of the Surety's guarantee application.
* * * * *


Sec.  115.30  [Amended]

0
7. In Sec.  115.30, in paragraph (d)(2)(ii)(C), remove the phrase ``or 
the warranty/maintenance period'', and in paragraph (d)(2)(ii)(D), 
remove ``$250'' and add ``$1,000'' in its place.
0
8. Amend Sec.  115.31 by revising the final sentence of paragraph (d) 
to read as follows:


Sec.  115.31  Guarantee percentage.

* * * * *
    (d) * * * For example, if a contract amount increases to 
$6,800,000, SBA's share of the loss under an 80% guarantee is limited 
to 76.5% [6,500,000/6,800,000 = 95.6% x 80% = 76.5%].
* * * * *


Sec.  115.32  [Amended]

0
9. In Sec.  115.32, amend paragraph (d)(1) by removing ``$50,000'' and 
adding ``$100,000, whichever is less'' in its place.
0
10. Amend Sec.  115.35 by revising paragraph (c)(1), and in paragraph 
(c)(4), by removing ``90 days'' and adding ``45 days'' in its place.
    The revision reads as follows:


Sec.  115.35  Claims for reimbursement of Losses.

* * * * *
    (c) Claim reimbursement requests. (1) Claims for reimbursement for 
Losses which the Surety has paid must be submitted (together with a 
copy of the bond, the bonded Contract, and any indemnity agreements) 
with the initial claim to OSG on a ``Default Report, Claim for 
Reimbursement and Report of Recoveries'' (SBA Form 994H), within 90 
days from the time of each disbursement. Claims submitted after 90 days 
must be accompanied by substantiation satisfactory to SBA. The date of 
the claim for reimbursement is the date of receipt of the claim by SBA, 
or such later date as additional information requested by SBA is 
received.
* * * * *


Sec.  115.36  [Amended]

0
11. In Sec.  115.36, amend paragraph (a)(3) by removing ``90 days'' and 
adding ``45 days'' in its place.


Sec.  115.67  [Amended]

0
12. In Sec.  115.67, amend paragraph (a) by removing ``$50,000'' and 
adding ``$100,000, whichever is less'' in its place.
0
13. Revise Sec.  115.69 to read as follows:


Sec.  115.69  Imminent Breach.

    (a) No prior approval requirement. SBA will reimburse a PSB Surety 
for the guaranteed portion of payments the Surety makes to avoid or 
attempt to avoid an Imminent Breach of the terms of a Contract covered 
by an SBA guaranteed bond. The aggregate of the payments by SBA under 
this section cannot exceed 10% of the Contract amount, unless the 
Administrator finds that a greater payment (not to exceed the 
guaranteed portion of the bond penalty) is necessary and reasonable. 
The PSB Surety does not need to obtain prior SBA approval to make 
Imminent Breach payments, except that the PSB Surety may request SBA to 
approve payments that exceed 10% of the Contract amount prior to the 
Surety making the payment. In no event will SBA make any duplicate 
payment under any provision of these regulations in this part.
    (b) Recordkeeping requirement. The PSB Surety must keep records of 
payments made to avoid Imminent Breach.


Sec.  115.70  [Amended]

0
14. In Sec.  115.70, amend paragraph (a) by removing the term ``1 
year'' in the first sentence and adding ``90 days'' in its place and by 
removing the term ``90 days'' in the third sentence and adding ``45 
days'' in its place.

Jeanne A. Hulit,
Acting Administrator.
[FR Doc. 2014-00295 Filed 1-10-14; 8:45 am]
BILLING CODE 8025-01-P