What is a Supply Bond?
A supply bond is one of several types of contract bonds which 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 comes into play to protect against the shortage or loss of an adequate supply of materials needed to complete the project.
How Do They 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.
What Do They Cost:
Supply bonds do not cost set amounts of money, and the actual cost will depend 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 which exceed a value of $100,000.
The amount of a bond will generally be an amount equal to the value of all the materials which 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% or 2% of the amount of the bond itself. In cases where the supplier has a riskier credit history, the percentage may climb to between 3% and 5% 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% 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% 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.
Supply Bond vs Performance Bond
These often go hand in hand, and if you get one, it might be advisable to get the other. Both show potential and current clients that you are trust worthy. If you’re not sure what type of bond you need, reach out to us with any question you may have. We’re happy to help.
Surety by NFP for all your bonding needs. We can help you get yours today!