Imagine showing up to a work site to find the supplies you need were never delivered. You’d probably wonder when—or even if—they would arrive. What’s the likely impact on your project schedule? Will you have to switch to another supplier? Will you have any trouble getting your money back? Supply bonds are a type of contract bond that guarantees you won’t find yourself in this situation. These bonds are meant to guarantee the timely delivery of materials specified in a construction contract. They do not, however, cover labor or installation costs.
Learn more about this type of bond, or contact our experienced surety agents for assistance with any questions you may have.
Who Needs Them?
Project owners often put a clause into their contracts stating that the contractor must require suppliers to purchase a supply bond. The project owner may be a private entity or a government agency at the federal, state, or local level. The Miller Act mandates supply bonds for federal contracts in excess of $100,000, but each state and municipality establishes their own requirements. Not all public works contracts will require these bonds.
How Do They Work?
In such arrangements, the contractor, as the entity purchasing and receiving the supplies, is the obligee protected by the bond. The supplier required to purchase the bond is the principal.
A supply bond is the supplier’s guarantee to deliver all materials in accordance with the contract. That means delivering the exact materials specified, to the precise location specified, within the time frame specified. The contractor can recover any costs incurred due to a supplier’s failure to live up to its contractual obligations by filing a claim against the bond.
The surety company that underwrote and issued the bond will investigate each claim to determine its validity. If the claim is found to be valid, the surety will pay up to the full penal amount of the bond. The supplier, as the principal, is then obligated to reimburse the surety company for the full amount paid out.
What Do They Cost?
There are two key factors that enter into determining the supply bond cost for the supplier. Chief among these is the required dollar amount of the bond, which is established by the contractor in the role of obligee.
The other main factor is the supplier’s creditworthiness and reliability, as indicated by the owner’s personal credit history, financial stability, and experience in the industry. All of these are good predictors of the risk of contract default and are taken into account in assigning a premium rate to the supplier. Suppliers who are considered creditworthy and reliable enough to qualify for a supply bond will pay anywhere from 0.3% to 2% of the bond amount. The exact cost in this range depends on the item being supplied, the circumstances (for example, freight on board), and the credit/financial history.
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At Surety Bond Professionals, we have over 30 years of experience providing construction surety in Massachusetts and nationwide. Simply fill out our online quote form to get started. Request a quote today, and see if we can save you some money on the bonds you need.