[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
