Federal Register Extracts

Agency: "U.S. Small Business Administration."

SUMMARY: This final rule revises various regulations related to SBA's Surety Bond Guarantee (SBG) program because they are obsolete, unnecessary, ineffective, or burdensome. Additionally, this final rule clarifies and modernizes certain regulations and conforms them to industry standards.

DATES:

This rule is effective September 7, 2022.

FOR FURTHER INFORMATION CONTACT: Jermaine Perry, Management Analyst, Office of Surety Guarantees at (202) 401-8275 or [email protected].

SUPPLEMENTARY INFORMATION:

A. General 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, authorized pursuant to part B of title IV of the Small Business Investment Act of 1958, 15 U.S.C. 694a et seq., 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. SBA is authorized to guarantee a Surety for a contract up to $6.5 million and, with the certification of a contracting officer of a Federal agency, up to $10 million. For more information about SBA's Surety Bond Guarantee Program (SBG Program), see https://www.sba.gov/funding-programs/surety-bonds.

As part of its ongoing responsibility to ensure that the rules it issues do not have an adverse economic impact on those affected by those rules, the U.S. Small Business Administration (SBA) published an Advance Notice of Proposed Rulemaking (ANPRM) in the Federal Register on June 3, 2019 (84 FR 25496) seeking input from the public in identifying regulations under the SBG Program that affected parties believed should be repealed, replaced, or modified because they are obsolete, unnecessary, ineffective, or burdensome. In the ANPRM, SBA also solicited comments from the public on how SBA can improve the surety bond products, procedures, forms, and reporting requirements of the SBG Program. SBA considered the 54 comments submitted by the public in response and published a proposed rule in the Federal Register on September 23, 2021 (86 FR 52844) to revise various regulations in part 115 of title 13 of the Code of Federal Regulations that are obsolete, unnecessary, ineffective, or burdensome and to clarify and modernize certain regulations to conform them to industry standards. The comment period was open until November 22, 2021.

In response to the request for comments, SBA received 8 comments, including 2 from national trade associations, 5 from surety organizations, and 1 was anonymous. The commenters expressed general support for all or some of the proposed changes, and SBA received no comments expressing opposition to any of the proposed changes (with one comment received that did not relate to any of the proposed changes).

The comments received are summarized and addressed below in the section-by-section analysis.

C. Section-by-Section Analysis

Section 115.10. Under the current definition of "Contract" in this section, a Contract may include a maintenance agreement that is ancillary to a Contract for which SBA is guaranteeing the bond ("ancillary maintenance agreement"). SBA proposed to clarify the definition for these ancillary maintenance agreements and to also expand the definition of Contract to include stand-alone maintenance agreements.

Under the current definition, SBA will guarantee the bond for a maintenance agreement if the agreement is for 2 years or less and covers defective workmanship or materials only. It has been SBA's long-standing interpretation that the maintenance agreement must be ancillary to the Contract for which SBA is guaranteeing the bond and may not cover defective workmanship or materials that is covered by a manufacturer's warranty. The current definition also provides that, with SBA's written approval, the term of a maintenance agreement can be longer than 2 years for defective workmanship or materials or cover something other than defective workmanship or materials if the agreement is ancillary to the Contract for which SBA is guaranteeing a bond, is performed by the same Principal, and is customarily required in the relevant trade or industry.

For clarity, SBA proposed to modify the existing definition by expressly applying the following requirements to all ancillary maintenance agreements: (1) the agreement must be ancillary to a Contract for which SBA is guaranteeing a bond; (2) the agreement must be performed by the same Principal; and (3) the agreement may only cover defective workmanship or materials that are not covered by a manufacturer's warranty. With SBA's prior written approval, the agreement covering defective workmanship or materials may be for a term longer than 2 years, or the agreement may cover something other than defective workmanship or materials, if such agreement is customarily required in the relevant trade or industry.

SBA received one comment from a national trade association expressing support for the changes to the definition, noting that the need for the SBG Program to cover stand-alone maintenance bonds was raised by a small contractor participant at a bonding awareness education program. The commenter also suggested that maintenance bonds can be structured as an annual renewable performance bond. However, annually renewable multi-year stand-alone maintenance agreements would be covered by SOP 50 45 3, section 5.5, which states that such contracts are eligible for SBA's guarantee provided that the contract amount does not exceed the statutory limit and provided that each option year following the initial contract year is treated as a separate obligation for which a new guarantee application must be submitted. SBA is adopting the changes as proposed.

Section 115.12. Under section 411(a)(1)(B) of the Small Business Investment Act of 1958, SBA may guarantee a surety bond for a total work order or contract amount that is greater than $6,500,000 (as adjusted for inflation under 41 U.S.C. 1908), but not exceeding $10,000,000, if a Contracting Officer (CO) of a Federal agency certifies that such a guarantee is necessary. Paragraph (e)(3) of section 115.12 currently requires the CO's certification to include a statement that the small business is experiencing difficulty obtaining a bond and that an SBA bond guarantee would be in the best interests of the Government. In response to comments received in response to the ANPRM ((84 FR 25496), SBA proposed to streamline paragraph (e)(3) to remove the requirement of this statement and require only that the CO certify that the guarantee is necessary, which as noted above is the standard set forth in the statute. SBA also proposed to update the manner in which this certification may be submitted to SBA by providing that it may be either express mailed to SBA, Office of Surety Guarantees, 409 Third Street SW, Washington, DC 20416, or submitted by email to [email protected], along with additional information that identifies the small business and the contract. SBA received two comments from two national trade associations expressing support for these changes, and 4 other comments expressing general support for the proposed rule. SBA is adopting the changes as proposed.

Section 115.14. Paragraph (a) of this section provides that, if one of the six events listed in paragraph (a) occurs under an SBA-guaranteed bond, the Principal and its Affiliates lose eligibility for further SBA bond guarantees. One such event, described in paragraph (a)(3), is when the Surety has established a claim reserve for an SBA-guaranteed bond of at least $1,000, an amount which was set by the SBG Program in 1996. As SBA explained in the proposed rule, SBA considered the purpose of this provision, which is to exclude Principals that have demonstrated an unacceptable financial risk under a current SBA-guaranteed bond from receiving future SBA bond guarantees and determined that the $1,000 claim reserve threshold no longer reflects a degree of financial risk that should trigger the Principal's ineligibility for future SBA bond guarantees. After evaluating several factors, including inflation since 1996, the increase in the maximum contract amount for which SBA can issue a bond guarantee (from $1,250,000 in 1996 to $6,500,000 today), and historical claim reserve data, SBA proposed to increase the amount of the claim reserve that would result in the Principal and its Affiliates losing eligibility for further SBA bond guarantees from at least $1,000 to at least $10,000. SBA received five comments in general support of this change, and SBA is adopting this change as proposed.

Sections 115.19 and 115.64. Under SEC 115.19(f)(1)(ii), SBA is relieved of liability under the bond guarantee if the bond was executed "after the work under the Contract had begun" unless the Surety submitted, and SBA executed, SBA Form 991, "Surety Bond Guarantee Agreement Addendum" with the evidence and certifications required by SEC 115.19(f)(1)(ii). Paragraph (f)(2)(i) currently provides that work under a contract is considered to have begun when a Principal "takes any action at the job site which would have exposed the Surety to liability under applicable law had a bond been Executed (or approved, if the Surety is legally bound by such approval) at the time." In addition, under 13 CFR 115.64, a Surety participating in the Preferred Surety Bond Program (PSB Surety) is prohibited from executing or approving a bond "after commencement of work under a contract" unless the Surety obtains written approval from the Director of Office of Surety Guarantees (OSG). To apply for such approval, the Surety must submit a completed SBA Form 991 with the evidence and certifications required under SEC 115.19(f)(1)(ii).

--This is a summary of a Federal Register article originally published on the page number listed below--

Final rule.

CFR Part: "13 CFR Part 115"

RIN Number: "RIN 3245-AH08"

Citation: "87 FR 48080"

Federal Register Page Number: "48080"

"Rules and Regulations"