A supply bond is a type of contract surety bond that serves as a guarantee that a contractor will deliver all materials agreed upon for a given project. Supply bonds are typically used in large construction projects involving a wide variety and/or high volume of materials. You must obtain a supply bond when required by law or the project owner. By the Federal Miller Act, supply bonds are legally required for all public construction projects that exceed $100,000. Some state and city laws also set lower minimum requirements for projects in their area, so be sure to clarify what the regulations are in your area. For private projects, whether or not a supply bond is needed depends on the owner. Project owners may require a supply bond for purchasing materials that are costly, specialized, or otherwise highly valuable. Sometimes project owners also will only give out contracting jobs to bidders who have a supply bond. In such cases, bonds can give you a competitive edge in securing larger projects.
Supply Bonds do not have a fixed cost; instead, a surety bond company will provide you with an appropriate bond premium based on information in your application.
Two main factors determine the cost of a supply bond:
Bond Amount: As the obligee, your client —the purchasing party that is requiring the supply bond — will establish the bond amount based on the value of all the materials needed. This amount is then used as the base to calculate the cost you pay.
Credit/Financial History: If your credit score is upwards of 700, approximately 1% of the bond amount will generally be imposed as a premium. If you are facing credit challenges, it may be 10% or more due to the greater credit risk assumed by the surety company that is issuing the bond.
As an example, let's say you needed a bond of $60,000 and you qualified for a rate of 1%. You would need to pay $6,000 for the supply bond. The amount you pay is known as the bond premium.
As a surety bond, supply bonds involve three parties: a principal, an obligee, and a surety.
In supply bonds:
In short, all parties involved benefit from a supply bond. As the supplier, you benefit by expanding your opportunities to include larger-scale and higher-cost projects. By having the capacity for a supply bond and fulfilling contractual agreements successfully, you will gain a greater degree of reliability. This boosts your credibility and distinguishes you from competitors, allowing you to access more lucrative jobs. The obligee — your client that is purchasing materials — also benefits from a supply bond by mitigating potential risks of unexpected losses.
You can obtain a supply bond by submitting an application detailing your bonding needs to a surety agency. For the bonding company to evaluate your financial stability, the required documentation typically includes the following:
After reviewing your application and documentation, the surety agency will provide you with a quote for the bond. Once you sign all the necessary paperwork and complete the payment, the surety agency will provide you with the supply bond.
If you need a supply bond today, get started with our 3 minute application process, or give us a call today at 888-236-8589.
In the event that you are unable to supply your client with the agreed upon materials, they would be eligible to file a claim with the surety company. The surety would then investigate the claim to determine whether or not there was a breach of contract, and if so, to what extent. Based on their findings, the surety agency would provide payment in full up to the amount of the bond for the obligee. Finally, you would need to pay the surety back as the principal, including any additional interests of costs for the investigation. If you are unable to reimburse the surety company, it may harm your reputation so that it would be more difficult to obtain bonds in the future.
However, a claim would only be filed given a breach of contract. To avoid these potential costs, the best approach is to honor all legal agreements. If for any reason a claim ends up being paid out, it is imperative to repay the surety agency to prevent further consequences.
Yes — but your options depend on your credit score and financial history. If you face credit challenges such as a score below 700, bonds will be higher-cost and offered by a limited number of surety agencies. While some agencies may deny bonds to those who do not meet their credit standards, others have designated programs for bond applicants with bad credit. To obtain a supply bond with bad credit, it is important to find the suitable bonding agency for your financial situation.
Supply bonds only cover the cost of materials, not any type of labor.
In other words, supply bonds guarantee the delivery of materials from one place to another but not the execution of the construction itself.