Supply Bond

A supply bond is one of several types of contract bonds that are intended to guarantee that a supplier will produce materials needed for a specific job or project. These are generally only necessary on very large projects with a great many materials potentially involved, or a high volume of just a few materials. If the supplier is unable to produce the needed materials for any reason, this bond would then protect the purchaser against potential losses or setbacks.

As any large construction project gets underway, it will be necessary for almost all parties involved to purchase some kind of a surety bond in order to guarantee performance and to limit any potential losses to the project manager. These bonds come into play to protect against the shortage or loss of an adequate supply of materials needed to complete the project.

How does a supply bond work?

In the event that a vendor or supplier is unable to contribute these supplies and materials specified in the bond contract, the obligee, which would generally be the project manager or owner, would have the right to file a claim. Since this would constitute a breach of contract, the obligee would be entitled to make a claim against the amount of the bond issued by the surety company.

The surety company would then be responsible for paying the amount of any claim found to be valid, after which it would then be within its rights to pursue the supplier for breach of contract. Clearly, it is in the best interests of the supplier to do everything possible to live up to the terms of the supply contract bond, since he would ultimately have to pay the amount of any claim. A supplier's reputation could also be damaged by defaulting on the terms of a supply contract bond, so that's another incentive for living up to the terms of the bond faithfully.

How much do they cost?

The actual cost depends on a number of factors. For instance, the amount of the bond will have a direct bearing on how much it costs, as will the type of bond, and the credit circumstances of the applicant. While every state imposes its own requirements on supply bonds, they are generally only required on federal projects exceeding $100,000 in value.

The amount of a bond will generally be an amount equal to the value of all the materials that need to be supplied on a given project; however, the cost of the bond will only be a certain percentage of this amount. The percentage imposed as premiums on the supplier purchasing the bond will generally be something in the neighborhood of 1 percent or 2 percent of the amount of the bond itself. In cases where the supplier has a riskier credit history, the percentage may climb to between 3 percent and 5 percent of the bond amount, simply because the bond purchaser is a greater credit risk for the surety company.

So for example, a good-credit supplier who is only paying 1 percent of a bond amount of $50,000 would be able to purchase a supply bond for $500, whereas a poor-credit supplier who is obliged to pay 5 percent of the same bond amount would have to pay $2,500 for a bond. Although it can be a financial imposition on a supplier, it is worth purchasing this bond, because it can lead to greater opportunities for a supplier who performs well and fulfills the terms of the agreement with a project manager.

If you have questions about supply bonds or other bonding options, give us a call.